In January the FCA issued a consultation paper CP19/7 Financial Conduct Authority Consultation on proposals to improve shareholder engagement. This was a technical consultation on how to implement the EU Shareholder Rights Directive II in relation to its Stewardship aspects.
Today 27 March UKSA and ShareSoc made a joint response, on behalf of individual investors.
We made a number of points, see below, with further background in an Appendix. We think this is important context to our response to the FCA consultation as there are broad issues that impact on the implementation of the EU Shareholder Rights Directive II, the Stewardship Code review and the joint FCA/FRC Discussion Paper-Building a regulatory framework for effective stewardship and to only respond in a narrow way to The FCA specific questions might mean the FCA missed the bigger picture.
- The title of this consultation is confusing and misleading, ie “Consultation on proposals to improve shareholder engagement”. This consultation only relates to the implementation of those parts of the EU Shareholder Rights Directive II that relate to stewardship, which have to be harmonised into UK Law.
- We note para 1.9: The implementation of SRD II through the FCA proposed new rules for asset owners and asset managers sets an important baseline in a continuum of measures to drive effective stewardship.The revised Stewardship Code aims to encourage higher standards beyond this baseline. Many of the 28 EU states are considerably less advanced than the UK. The UK operates to much higher standards and in so doing has a competitive advantage. FCA proposed new rules may recognise this. Therefore, the FCA can and should consider the role of individual investors in engagement and stewardship.
- The role of individual investors in engaging with companies and stewardship should be given more weight in the FCA considerations.
- We very much welcome the reference to The Law Commission Review of Intermediated Securities, in para 4.13 on page 17 of DP19/1. This Law Commission Review must be given a much higher priority if retail investors are to exercise their role as stewards of the companies in which they invest. Retail investors own, on average, 29% of AIM companies and 12% of main market companies. They are a non-trivial constituent to the engagement and stewardship issue.
- Investor Engagement and Stewardship should not be looked at in isolation from fund performance and fund fees. The proposed requirements for fund managers to report annually to asset owners should be enhanced by performance data and tracking error statistics. It is important that these high-level reports contain information that will highlight closet indexing. (see answer to question 3).
- Asset owners should have to report to beneficial owners on their stewardship principles and how they have operated these principles in practice in the past year. (see answer to question 5).
The full response is here FCA CP19_7 Proposals to Improve Shareholder Engagement UKSA-ShareSoc response V3
The FCA consultation paper can be downloaded here https://www.fca.org.uk/publication/consultation/cp19-07.pdf