ShareSoc & UKSA response to FCA Consultation CP21/12 = Proposals should be scrapped!

ShareSoc and the UK Shareholders Association made a joint submission on the FCA Consultation FCA CP21/12: A new authorised fund regime for investing in long term assets.

In a 12 page response to the FCA consultation, we concluded the idea of LTAFS was ill-founded and these proposals should be consigned to the scrap heap. We also said that no new type of fund should be contemplated until the FCA had reported on its Woodford investigation.

Our full consultation response is here: FCA Consultation Paper LTAF CP21_12 – Joint submission on behalf of ShareSoc and UKSA

The FCA consultation document can be read here: https://www.fca.org.uk/publication/consultation/cp21-12.pdf

The main points we made were:

1. This consultation fails to mention the Woodford debacle where an open ended fund invested in illiquid investments on a large scale, or the alleged failures of the FCA, Woodford, Link, Hargreaves Lansdown and Northern Trust, and/or the failings/ weaknesses of the Regulations in this regard. It also fails to mention that former BoE Governor Mark Carney said that Woodford and other open end funds were “built on a lie” (The FT reported 26 June 2019:
   “These funds are built on a lie, which is you can have daily liquidity,” Mr Carney told MPs at a parliamentary hearing
   https://www.ft.com/content/e6d5bf04-980b-11e9-8cfb-30c211dcd229  . See also
   https://www.ft.com/content/6998d614-a984-4781-a139-2d3e053cb66c).
2. Investors deserve the early conclusion and publication of the FCA report into Woodford. It is difficult to comment on the proposed rulebook Appendix 1 until the FCA concludes its report. There should be no haste to introduce a new Authorised regime until we fully understand the failings in the old regime and the reasons behind those failings.
3. We note your data that the DC investment market is growing from £340bn in 2015 to £1,000 bn in 2030. This statistic highlights the importance of individual investors.
4. We agree with you where you state that investors are missing out on returns of 1.4% p.a. because they do not allocate funds to this area.
5. There are arguments for the default DC fund to have part of DC funds allocated to these new authorised funds.
6. Costs and performance fees need careful consideration. If (say) 10% of the 2030 £1,000bn (i.e. £100 bn) is invested in LTAF (Long Term Authorised Funds), then if the charges are:
   1. 1%, then industry income from this is £1bn a year (n.b. £1bn times margin of 50% and p/e ratio of 20 = £10 bn of asset managers’ additional market value, which illustrates how much is at stake here). 1.4% extra return is £1.4bn a year, so the split of industry fees to investor returns is 40% to 60%. Too high!
   2. 2 + 20%, then the industry income from this is c £4bn a year (history tells us that 2+20% averages out at about 4%p.a. when you balance the very good with the bad years). 1.4% extra return is £1.4bn a year, so the split of industry fees to investor returns is 75% to the industry and only 25% to investors. This would be egregiously too high and, if allowed, we would suggest would surely be a future scam.
7. Annex 2 Cost benefit analysis fails to identify the costs and benefits we have (very roughly) calculated in para 6 above.
8. LTAF (Long Term Authorised Funds) is an awful misnomer and suggests a subliminal and reassuring message.
   1. It suggests other funds are not long term.
   2. The key aspect of these funds is that they are investing part of their funds in illiquid assets.
   3. A simple name might be more descriptive and satisfies the requirement for an honest name on the tin – Long Term Illiquid Assets in non-readily realisable securities – shortened to an acronym e.g. LIAs or LIARS?
   4. Putting the word Authorised in the title gives reassuring comfort, where it should not be given. Investment companies are Authorised but do not have the word Authorised in the title.
9. Para 3.13 of the consultation states “disclosures set out fairly, clearly and in plain language.” This cannot be the achieved if the title is designed by or for the benefit of the marketing department.
10. Sophisticated individual investors and HNW individual investors should be allowed to invest in these LTAF funds.
11. Governance of LTAF will require the nominee system to clearly identify the owner of the investment (e.g. DC Trust or an individual investor) and there should be a requirement that they automatically get sent a copy (electronically) of the annual report, proxy voting form and AGM and GM circulars. This must be the default position, unless an individual opts out. In the event that an individual asks his/her platform not to send this information she/he should be asked at least annual if they wish to continue this option.
12. There is no mention of liquidity and spreads in quantitative terms. The consultation says that there may be times when the LTAF is not liquid, but does not mention what size of dealing will readily be able to be dealt and what spread may apply. Nor is there a discussion of if a large stake is to be sold, how will this be dealt with. In our experience selling a few percentage points in a company can have a significant impact on the share price.
13. What problem is the FCA trying to solve? We do not think this is clear.
    1. We don’t see why the FCA wants to promote an open ended fund structure to invest in something that is so illiquid. The underlying assets naturally belong in a closed ended fund which is then listed on a stock exchange; in other words, in a closed ended investment company, regardless of whether it is an authorised investment company or not.
    2. There are already listed infrastructure funds which perform at least part of the role that LTAF appear to be aimed at.
    3. Given the very valid point that closed end investment companies do this already and a LTAF is not necessary, our view is that the proposals should be scrapped.

Cliff Weight, Director, ShareSoc

25 June 2021