In January 2019, the FCA and FRC issued a joint discussion paper DP19/1 Building a regulatory framework for effective stewardship.
On 15 April 2019, we made a joint response from UKSA and ShareSoc on behalf of individual investors. In our response we make the following key points:
- Investor stewardship must not let boards off the hook for their own stewardship. The Stewardship Code should be renamed the Investor Stewardship Code to better reflect what investors do and to better acknowledge the role of management and Boards in the stewardship of their shareholders’ capital.
- The role of individual investors in engaging with companies and stewardship should be given more weight in the FCA/FRC considerations. There are reasons why individuals are particularly good stewards (they have a long-term focus, their own money is at risk, among other things).
- We do not agree that retail shareholders rights should be outside the scope of this consultation. Retail investors own, on average, 29% of AIM companies and 12% of main market companies. They are a non-trivial constituent to the stewardship issue. At present only 6% of retail shareholders’ shares are voted at AGMs. The terms and conditions of legal agreements between retail investors and platforms mean that the rights to vote shares are held by the nominee. Platforms are therefore entitled to vote retail shareholders’ shares (to be specific, interests in shares). To date, we know of no platform nominee who has chosen to exercise this right, but this issue and platforms terms and conditions need to be reviewed. We very much welcome the reference to The Law Commission Review of Intermediated Securities(in para 4.13 on page 17 of the FCA/FRC DP19/1). The Law Commission Review must be given a much higher priority, so that retail investors can exercise their role as stewards of the companies in which they invest.
- 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 our answer to question 3 of CP19/7).
- Fund managers can be particularly bad stewards– i.e. quite the wrong people to be voting shares. Reasons include Index-following, short-termism, free-riding, need not to upset.
Our full response is here FCA_FRC DP19_1 Stewardship Discussion Paper – Building a regulatory framework for effective Stewardship on Code the UK Shareholders’ Association ShareSoc Response – FINAL 13 April 2019
The FCA/FRC consultation paper can be downloaded here https://www.fca.org.uk/publications/discussion-papers/dp19-1-building-a-regulatory-framework-effective-stewardship
This is one of three consultations. The FRC has issued a consultation units Draft Stewardship Code and the FRC issued a technical consultation on how to implement the EU Shareholder Rights Directive II in relation to its Stewardship aspects. Our responses are here FRC-Stewardship-Code-2019-Revisions-Consultation-response-Final2 and here FCA CP19_7 Proposals to Improve Shareholder Engagement UKSA-ShareSoc response V3
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