Employee Directors at Sports Direct

It seems that controversial company Sports Direct (SPD) are likely to become the first UK public company to have a worker on their board. They plan to appoint an elected “Worker’s Representative” who will attend and speak at board meetings although they would not formally be appointed as a director. A spokesman for Sports Direct said: “Having explored all options we believe this is the best way to ensure the Workers’ Representative is free to champion the interests of all staff. We see this as a major step forward in bringing about positive change.”

Comment: if that improves their employee relations, which has seemed far from ideal in the past, then so much the better. But is there not a risk that the person so appointed might be seen as a “shadow director”? For those not familiar with that concept, anyone who has significant influence on the operations of a company and its board could be seen as a shadow director and in that case the legal position is that they have the same duties and obligations as any other director (and the associated legal liability).

One objection to these kinds of arrangement is that employee directors might have power without the associated obligations and hence make cavalier decisions. But in this example, not being formal directors they presumably will not be able to vote on any board resolutions.

ShareSoc has not adopted any formal policy on employee directors although we do think that a Shareholder Committee is a better way to improve corporate governance and stakeholder engagement. The presence of a worker representative on a Shareholder Committee might be an alternative solution.

Roger Lawson

Government Action on Dormant Accounts

The Government has today reported that as much as £2 billion is sitting idle in dormant accounts such as share trading accounts, ISAs, pensions and insurance products. That includes £715 million alone in investment and wealth management accounts.

This is noted by the Independent Dormant Assets Commission set up by the Government which has looked at whether the existing scheme for dormant bank and building society accounts should be extended. Minister for Civil Society, Rob Wilson, suggests that this money could help change millions of lives if it was donated to charities.

Readers may not think they will ever lose track of accounts but as folks get older, move house or emigrate, accounts are often forgotten. Regrettably the use of nominee accounts to trade shares hardly encourages stockbrokers and platform operators to follow up on inactive accounts. Any dividends on shares simply accumulate within the client account but presently the account operator gets interest on that which they retain. This can continue for ever (even after the client has died) unless inactive accounts are chased up. The lack of even regular postal communications to the last recorded address now that everything has moved on-line makes it easy to lose track of clients and the longer it is left, the more difficult it is to trace account holders. With digital communication being the norm, and people changing email addresses regularly, so that messages to them just disappear into the ether you can see why this is a growing problem and why the sums involved have become so large.

When investors are on the share register, dormant accounts and the associated dividends return to the company who issued the shares eventually so they revert to the benefit of other shareholders. Whereas with nominee accounts the nominee operator gets the benefit.

So this is yet another dubious aspect of the nominee system and why stockbrokers are so keen on nominee accounts perhaps. ShareSoc has of course been complaining about the iniquities of the nominee system for some time.

The Commission has suggested that the introduction of a scheme to ensure these dormant accounts are donated to good causes should be voluntary, but it would surely be better that it was compulsory. Note though that no client can lose money as a result if they reappear. They can always reclaim the lost assets in any case.

Roger Lawson

AIC Press Release on VCTs

To follow on from my last blog post, another interesting press release from the AIC today was that on the performance of Venture Capital Trusts (VCTs). That’s particularly so when everyone is considering their tax bills at this time of year, i.e. those just paid and how they can avoid such big ones for the current year and next.

VCTs do of course offer upfront income tax relief when investing in new shares, and also tax free dividends thereafter. Many have been achieving high dividend yields in recent years. The AIC notes that the VCT sector “as a whole is up 82% by share price total return over the last decade”. In addition the top 20 VCTs are up an average of 141% over the last 10 years and have paid our an average total tax free dividend of 87 pence per share. The press release tells you which have been the top performing VCTs and when buying shares in these trusts it’s probably best to go for those who have demonstrated good long term performance as running these funds is not easy and proven experience is what seems to count. AIC press releases are given here: http://www.theaic.co.uk/aic/news/press-releases

Needless to say perhaps that Foresight VCT, which ShareSoc recently commented on, does not get a mention as it’s not in the top 20.

The AIC does of course give you comparative historic performance data on most investment trusts including VCTs on their web site.

Roger Lawson

AIC Response to Green Paper

The Association of Investment Companies (AIC) have published their response to the Government’s Green Paper on Corporate Governance. One recommendation contained therein is that “The AIC also recommends that a detailed study to assess retail investors’ access to voting services on platforms and other nominee account services is undertaken to identify any necessary reforms”. This is of course a very positive endorsement of an issue that ShareSoc has been campaigning upon for some time – see our campaign page here: http://www.sharesoc.org/shareholder-rights.html

In addition if you read the detail submission, they say “Additionally, the study should assess any barriers to switching providers that may be preventing shareholders, that do want to vote but are unable to, from moving to a provider that does offer this service”. This is indeed a very important issue also as currently it takes way too long to switch between brokers or platforms. For example, my latest broker switch has now been running since last October. And that’s not the first time I have experienced such delays. Anyone who experiences this problem should complain to the FCA as I have already done in the past – but they clearly do not get enough complaints about it because no action has been taken and the response did not likely indicate any will be.

Otherwise the AIC’s response to the Green Paper can be read here: http://www.theaic.co.uk/sites/default/files/hidden-files/AICBEISCorpGovReformresponseFeb17.pdf

Roger Lawson

The Future Value of Money

The future value of money was a question highlighted by a Government decision yesterday. The discount rate to be applied to awards to road accident victims and others, to ensure they always have enough to support their future needs, is to be changed to -0.75% (that’s minus 0.75%). Previously, and for many years, it has been assumed that they could invest a cash lump sum at a rate of plus 2.5%. That was on the assumption that they could invest in risk-free assets and get a return of that amount. But the Government is proposing to revise the rate. This will result in much higher payouts for major road accident injury claims, and for medical negligence claims.

There was a negative impact on the share prices of insurers such as Direct Line (down 7% on the 27th Feb), but others such as Admiral and Esure were little changed. However the Association of British Insurers (ABI) called the ruling a “crazy decision” and also said “To make such a significant change to the rate using a broken formula is reckless in the extreme, and shows an utter disregard for the impact this will have on consumers, businesses and the wider operation of the insurance market”. They forecast sharp rises for all forms of vehicle insurance with suggestions being made that it could be as much as £75 extra per car on average.

In addition because the NHS is one of the most frequent defendants to medical claims, it might add £1 billion to their annual bill for such costs. Something that the NHS surely cannot afford at present.

You may be wondering what is the risk free rate of return that one can actually get at present. The best measure traditionally for this has been assumed to be long-dated index linked gilts. The yield to redemption on those is now about -1.6% (see http://www.fixedincomeinvestor.co.uk for a good source of information on those). That’s taking account of inflation of course. In other words, you would actually definitely lose money by investing in them! That of course drives up the capital that is required to cover future investment losses enormously.

Now we all know that the Government has driven down interest rates to a ridiculously low level and negative gilt yields is one consequence. Together with tougher rules for pension and other funds, to ensure they cover future liabilities, this has led to an excess of demand for index linked gilts over their current availability. Hence the below zero interest rates. But surely no sensible person investing for the long-term would at present put all their assets into such gilts?

Even the most conservative and risk averse investor would surely not do so, and it seems unreasonable to argue that beneficiaries of court awards should be assumed to do so. Indeed they probably don’t and it seems unlikely that any financial advisor would suggest they do so either with current interest rates. Having some certainty of future income is important, but having absolute certainty about future finances for those dependent on a court settlement does not seem fair when nobody else does – pensioners for example, many of whom are also incapacitated and rely on Government care assistance, or even divorcees who benefit from other court awards. Incidentally there are specialist firms that look after funds for such beneficiaries such as listed company Frenkel Topping who presented at one of the ShareSoc seminars and there is a big market for “Personal Injury Trusts”.

The ABI previously launched a legal challenge by a judicial review to the Government’s inadequate consultation and decision process on this issue but it was rejected by the High Court.

Roger Lawson

Asset Management Market Study

I commented previously on the FCA’s Asset Management Market Study, which suggested there was weak competition in this market. Needless to say, most asset managers do not seem to agree.

ShareSoc has now submitted a response to the questions raised in that document which you can read here: http://www.sharesoc.org/Asset-Management-Market-Study-Response-2017-02-21.pdf

In summary, we agree with the general conclusions and support regulatory intervention where necessary. We also note that although the study does not address the issue directly of financial education, it is our view that this needs to be substantially improved if the public is to be able to engage with financial professionals and make their own informed decisions.

Please read our more detailed response for our answers to all the questions posed.

Roger Lawson

FCA Reviews Open Ended Funds with Illiquid Assets

The Financial Conduct Authority (FCA) is reviewing open ended funds that invest in such illiquid assets as property and infrastructure. It also potentially affects investments in private equity, unlisted securities and special purpose vehicles. If you recall, only a few months ago a number of property funds had to close to redemptions, i.e. investors could not get their money back, simply because of a minor panic over the impact of the Brexit Referendum vote. Although such funds do keep a cash buffer to cover day to day liquidity and can also adjust prices to deter redemptions, it seems this was not enough. The closures were mostly temporary but it highlighted the difficulties such funds can face.

The FCA have published a paper that covers the complex issues around this topic, and makes some suggestions to solve the problem (other than simply banning such funds). One is that “professional” investors might be treated differently to “retail” investors, i.e. there would be two classes of investors in the same fund. The principle behind this is that some investors might be more tolerant of short term fluctuations in fund values than others – for example retail pension investors may have a longer term horizon. How that would be reflected in the different treatment of multiple share classes is not clear.

Bearing in mind that only recently ShareSoc said to the FCA in a consultation response on their “mission” that we objected to “an artificial distinction drawn between wholesale and retail markets which does not and should not exist”. In other words, we would like all investors to be treated the same and there should be no prejudice against any one class, so it is unlikely we would support that proposal.

The FCA suggests a number of tools that fund managers could use to manage liquidity, or to warn investors about the risks of such funds. But why not simply ban them when there are alternative closed-end funds that provide exactly the same investment service – namely investment trusts? Such trusts do not have liquidity problems because they do not need to sell assets to meet redemptions (and it is the need to sell immovable assets in “fire sales” that cause the problem). Investors can sell their shares in the market at any time in investment trusts if they so wish.

It would seem that yet again the FCA is favouring the support of the institutions who manage open ended funds and profit from them, rather than those who invest in them, particularly retail investors. The latter often get advised to buy open-ended funds by IFAs and platform operators without being warned of the dangers they embody.

To read more go here: https://www.fca.org.uk/publications/discussion-papers/illiquid-assets-open-ended-investment-funds

If you have views on this matter, let ShareSoc know as we will be submitting a response to this consultation.

Roger Lawson