Readers who take any notice of financial affairs will be aware of the furore over the threat by Aviva to redeem their preference shares by a “share cancellation” process – they claimed that is a different legal process, even though the shares were described as “irredeemable”. The shares concerned dropped in price to a significant extent because their high coupon interest rate meant they were trading at a premium when cancellation would have meant redemption at the original par value. Aviva have reconsidered the matter, but the interesting aspect today was a response from the Financial Conduct Authority (FCA) to a letter from the Treasury Select Committee. You can read it here: https://www.investegate.co.uk/financial-conduct/rns/fca-response-to-tsc-on-aviva-plc-preference-shares/201803280704471964J/
It basically gives lots of reasons why they cannot yet respond to some of the questions as they are still looking into the issues, but in response to Question 4 they seem not to concede that they should be involved in “the resolution of the legal questions”. In other words, they would be quite happy to leave it to an enormously expensive law suit by investors to resolve the key questions.
They do not seem to accept that they have an overriding objective to ensure a fair market for securities and that investors should not be prejudiced by small print, concealed or opaque legal terms and other sharp practices.
The response to Question 6, seems to try and excuse the problem by saying the shares were issued more than two decades ago and the FCA has taken subsequent action “in order to restrict the retail distribution of regulatory capital instruments….”. This is surely not an adequate excuse. The shares concerned were and are publicly traded and there is nothing stopping any investor (at least a “sophisticated” one) from trading in them. But even sophisticated private investors and some institutions were caught out by the unexpected threat from Aviva.
The FCA is again proving to be toothless in the face of seriously unethical practices. In other words, they are not doing their job competently and should be reformed in my personal opinion. I believed the FCA adopted an objective of more “principle-based regulation” a few years back but now seem to have abdicated that responsibility and are quite happy to let lawyers argue over the wording of a prospectus while ignoring the ethical issues. Just as they did with the RBS and Lloyds cases. It’s simply not good enough to issue the kind of response they have to the Treasury Select Committee.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )