Open-Ended Property Funds – Our Views

ShareSoc has now submitted our response to the consultation by the FRC on “Illiquid Assets and Open-Ended Investment Funds”. This follows on from the problems experienced last year where property funds had to close to redemptions but it can affect other types of funds also such as private equity ones.

In summary after listening to a number of our members on this topic, we have chosen to say that although we would not be opposed to the banning of such funds entirely, we suggest the best way to ensure there are no problems in future is to ensure that very strong health warnings are given to investors who chose to invest in such funds. Obviously in the case of commercial property funds, there are a number of closed end funds (e.g. investment trusts) covering that sector so most investors should have very good reasons to choose open-ended ones instead.

You can read our full response here: Open-Ended-Funds which also contains a link to the FRC consultation document.

There were a couple of interesting articles related to this topic in the Financial Times recently. One reported that big UK property funds are hoarding cash – in several cases well over 20% of their assets. Presumably this is because of fears of a repeat of last year’s run on the real estate sector. Holding large amounts of cash obviously provides the liquidity to enable high requests for redemptions to be met and to counter market volatility, but it also reduces the returns from the fund in the longer term as cash typically yields less than property. It would be unusual for a real estate investment trust to hold that much in case, and often they are more than fully invested as they use gearing to improve returns.

Another article reported on the Association of Real Estate Funds (Aref) response to the aforementioned consultation. Their report called for a “comprehensive review” of the rules governing retail property funds as it was unclear what fund managers were allowed to do. A somewhat odd comment and the FRC consultation document clearly covers the matter in some detail already. But another suggestion made is that the problem could be resolved by having a range of different fund structures because most investors are not actually looking to “day trade”. So a range of products reflecting the different liquidity needs of investors might be offered.

Comment: An interesting idea but would it really be practical? It would also add confusing complexity to investors choice. Investors find it difficult to anticipate when they might want to sell, and some sales might be crystalised by the death or major financial/personal crisis of an investor. Would they be considered an exception, or just told it’s bad luck they chose to invest in a fund that requires six months or a year withdrawal notice – because that is how long it might take to dispose of commercial property? For private equity funds, it might take even longer to dispose of assets.

And would investors choose funds with lower returns in preference to others with higher returns? Which might be the result of them offering high liquidity at all times, and holding cash or other low return assets to enable the former to do so?

Behavioural responses to such scenarios could be complex.

Roger Lawson

Secret Cautions by the FCA

The Financial Times reported this morning that it had obtained information from the FCA on the number of private warnings it had issued over the last 5 years using a Freedom of Information Act request. The answer given was that there had been 39 of them.

ShareSoc has complained about this practice in the past, particularly with regards to AIM companies where the LSE has a similar approach. Indeed we complained about the use of private warnings in our submission to the FCA’s consultation on its “mission” only in January.

John Mann, M.P., who sits on the Treasury Select Committee was quoted in the FT article as saying: “Transparency is absolutely key. Anything that allows things to be dealt with in secret is damaging to the whole culture of financial services, and opens the regulator up to challenge”. One surely cannot but agree with that. Justice must be seen to be done as the well known aphorism goes.

Shareholders in companies do need to know if the FCA has criticised directors in the past, and the details of any such complaint. It also apparently causes problems for those handled in this way because they do have to disclose private warnings to new employers and can only appeal them if challenged with a judicial review (an extremely expensive process).

It’s that old “city club” mentality again. “We’ll just have a quiet word with the chap” rather than disclose it in public and damage his/her reputation seems to be the attitude. It’s surely time such practices were dropped. If it’s serious enough that the FCA formally investigates the matter, then any conclusion should be made public and the people involved named.

Roger Lawson

Clamp Down on CFDs – ShareSoc’s Comments

The Financial Conduct Authority (FCA) is proposing to clamp down on CFDs (contracts for difference) and similar financial products such as binary bets. CFDs are complex financial products that have historically been used by sophisticated traders. But they have been growing rapidly in usage by small retail “investors” and the FCA reports that 82% of them lose money based on a review of such accounts.

ShareSoc has now published it’s formal response to the FCA’s consultation on their proposals to tackle this problem. You can read it here:

In summary we support the FCA’s proposals with only minor reservations.

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:

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:

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

Roger Lawson

Obtaining Information on Frauds

One of the things that investors find frustrating is the failure of the regulatory authorities (FCA, SFO, the Police, LSE) to obtain information on the progress or results of investigations into the affairs of companies. For example, if a company and its shareholders are the clear victims of a fraud, often involving false accounting such as in Globo not so long ago and at BT only recently, then obtaining information about the matter is exceedingly difficult.

If the company goes into Administration, the Administrators have no obligation to tell shareholders anything (you are not even legally recognised as “creditors”), and although they have a legal obligation to produce a report for the BEIS Department this is not publicly disclosed.

So for example, Torex Retail (one of the largest AIM companies at the time) was a classic case of fraudulent accounting – sales revenue being invented in essence. The company was pushed through a pre-pack administration and shareholders lost everything. Only some years later were some of the executives actually prosecuted and convicted. In the meantime no information was provided and the chance of pursuing a civil action for recovery of losses was lost.

If you ask the FCA for information they will typically say “we never disclose information on the progress of investigations”, and the London Stock Exchange (LSE) take the same approach on AIM companies. Indeed we complained about this attitude in ShareSoc’s recent submission to the FCA on their “Future Mission”.

Now if you are the victim of other crimes the Police take a very different stance and will respond to questions. For example, they will indicate if a prosecution is likely and when, or if, their investigation has been concluded. If they plan no action, they will say so.

Do they simply have a more co-operative frame of mind? No – it’s probably because they know they are subject to a “Code of Practice for Victims of Crime” (you can find it on the internet). This was established by the Ministry of Justice as a result of the Domestic Violence, Crime and Victims Act 2004.

The key point for investors is that this Code actually applies also to anyone who is a victim of financial crime, and it specifically covers the Police and the FCA/SFO/BEIS – the latter being classed as “Other Service Providers” whose obligations are covered in Chapter 5.

So what are their obligations under the Code? They are:

1.27 Where a victim reports a criminal offence to a service provider responsible for investigating offences, the service provider must ensure that the victim receives a written acknowledgement, including the basic details of the offence.

1.35 The service provider responsible for investigating the offence must, without unnecessary delay, ensure that a victim is notified of their right to receive a decision not to proceed with, or to end, an investigation into that crime.

1.36 The service provider responsible for prosecuting an offence must, without unnecessary delay, ensure that a victim is notified of their right to receive the following information:

  1. a decision not to prosecute a suspect;
  2. the time and place of the trial and the nature of the charges against the suspect.

1.37 The service provider responsible for prosecuting an offence must, without unnecessary delay, ensure that a victim who is a witness in the criminal proceedings is notified of their right to receive the following information:

  1. information about the state of the criminal proceedings, unless in exceptional cases the service provider considers the proper handling of the case may be adversely affected by the notification of such information;
  2. the final outcome in any trial.

1.38 If a victim requests information following notification in accordance with paragraphs 1.35-1.37 above, the relevant service provider must ensure it is provided. In providing the information listed in paragraphs 1.35, 1.36(a) and 1.37(b) the service provider must give at least a brief summary of the reasons for the decision concerned (in the case of 1.37(b), only where such reasons are available).

So you can see that they do have an obligation to provide information within reason which they seem to have been ignoring in financial cases. Indeed sometimes they close an investigation and issue a “private warning” which is not made public or even advised to those who have complained.

Now these Code obligations primarily relate to those who are personal victims (business and other organisations are not covered so ShareSoc could not rely on the Code to represent our Members for example in this regard). So if you are the victim of a fraud by a company or its directors, then it is important that you report it personally to the FCA, SFO or another body and then they will have a duty to respond to questions on the matter. You can invoke the above “Code” if they think otherwise.

Roger Lawson

FCA’s Mission Statement – A Suggestion

The Financial Conduct Authority (FCA) has been consulting on its “Future Mission” and ShareSoc has submitted a detailed response. It can be read here: and there is also a press release which we issued this morning which summarises it:

It’s a pretty devastating critique of the activities of the FCA and the muddled thoughts about its mission statement. It has occurred to me that actually writing a mission statement for the FCA should not be that difficult, so here’s my attempt at it. Note: this is my personal view and is not necessarily formal policy of ShareSoc. 

A Mission Statement for the Financial Conduct Authority

  1. We will ensure that financial markets are fair, honest and orderly (that includes not just stock markets but markets for other financial services such as insurance, pensions, banking services, etc).
  2. We will enforce the law and vigorously pursue those who break laws or regulations. Where infringements are proven we will impose penalties and “name and shame” the malefactors.
  3. We will ensure that information is provided to all market participants equally.
  4. We will ensure that investors have the information to make informed decisions on financial investments and other financial services and that such information is unbiased.
  5. That no distinction will be drawn between the wholesale and retail markets (i.e. that individual investors will not be excluded from wholesale markets or prejudiced in any way).
  6. We will not protect retail investors or consumers of financial services from their own ignorance or foolishness, but we will ensure they have access to free or low cost education and free information about any investments or services they are contemplating including the likely risks and returns to be obtained from them. Such information to be provided should be appropriate to the likely readers.
  7. We will generally deter speculation, the excessive use of gearing, trading on margin and other such financial activities where they serve no purpose other than to promote gambling activity rather than serve the underlying needs of businesses or consumers.
  8. We will ensure that the ownership of investments is legally clear and not obscured by artificial structures such as nominee accounts.
  9. We will only approve the sale of new financial products or services where they meet a genuine need that is not adequately covered at present.

So that’s it on the principle that all good mission statements are short and easily comprehended. What more is needed?

If you think there should be more, please contact me.

Or if you think it should be shorter, one could consider the mission statement of the US Securities and Exchange Commission (SEC) which is: “The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation”. An admirable encapsulation, but that only covers stock markets of course.

Roger Lawson