IMA defends UK stock lending disclosures
14 September 2011 London
Image: Shutterstock
The Investment Management Association (IMA) has defended the current stock lending disclosure requirements following investor concerns over the practices.
“Stock lending by funds is a regulated activity,” said Julie Patterson, director of authorised funds and tax at IMA. “In particular, there are requirements on disclosures of all charges and expenses, the risks involved, and the net return for the fund.”
“Managers can enter into stock lending only if it appears to be appropriate to do so with a view to generating additional income for the fund with an acceptable degree of risk,” she adds.
SCM Private, a UK-based retail investment specialist which recently conducted research on securities
lending disclosures, found that present UK legislation does not require retail fund managers to disclose that they can lend less than 100 per cent of their assets in any marketing or investor communications, other than buried in the full prospectuses that are typically 100 pages.
“I am not against the practice of securities lending if it is done in a conservative fashion, is in everybody’s interest and helps the return of the fund,” said Alan Miller, founder and CIO of SCM Private. “But [investors] should be allowed to know the amount, who the people are that are borrowing their savings as well as what exactly is being deposited against those savings and, quite simply, an investor is not provided with that information."
The IMA says that there are detailed rules from the Financial Services Authority (FSA) on the UK stock lending market in order to mitigate any risks, such as approvals for terms, authorised counterparties and approval and treatment of collateral. “The IMA are happy with the level of disclosure required by the FSA,” Patterson said.
In response, Miller said that “the IMA continues to condone very poor transparency of charges, investments and risks by its members. The IMA does not seem to agree with Donald Kohn, external member of the Bank of England’s [Interim] Financial Policy Committee, who has called for greater transparency among financial institutions, instruments, and markets, and for institutions to provide timely, up-to-date, and comprehensive information”.
What prompted Miller to conduct the research, was increased regulatory scrutiny of exchange traded funds (ETFs), which have been in the spotlight as both the European Securities and Markets Authority (ESMA) and the Australian Securities Investment Commission (ASIC) have issued guidance which, among other things, recommends explicit disclosures of securities lending practices for those specific products.
But Miller claimed the FSA appears to take this seriously within just synthetic ETFs, having seemingly completely ignored the similar risks within physical ETFs, mutual funds, structured products and the financial spread betting industry.
“If the FSA is suddenly going to start regulating products on the basis of whether investors
can understand them, one would have thought the FSA would take it very seriously that those
funds should provide the information to investors so they can be aware of and able to analyse
the risks involved,” Miller added.
Another concern highlighted by the survey is the lack of transparency in how fees earned from securities lending business within the fund is split with investors.
“You would expect there to be some justification for the split of fees between company and investor, as the investor normally takes 100 per cent of the risk,” Miller said. “The rules basically allow the majority of such fees to be kept by the stock lending agent and the fund manager and the minority of it passed on to the client. Why should there not be a prescribed minimum amount which is
passed on to the fund investors?” Miller says.
He noted, however, that there are good examples of fund managers engaging in securities
lending, such as T. Rowe Price and Vanguard in the US, passing on the vast majority of the fees back to investors.
SCM Private does not directly take part in stock lending, but through its investments in exchange traded funds is exposed to stock lending within some of these funds. However, Miller noted that this does not take place within the synthetic ETFs which it holds as the securities lending by the banks running these funds is normally outside the ETF.
“Stock lending by funds is a regulated activity,” said Julie Patterson, director of authorised funds and tax at IMA. “In particular, there are requirements on disclosures of all charges and expenses, the risks involved, and the net return for the fund.”
“Managers can enter into stock lending only if it appears to be appropriate to do so with a view to generating additional income for the fund with an acceptable degree of risk,” she adds.
SCM Private, a UK-based retail investment specialist which recently conducted research on securities
lending disclosures, found that present UK legislation does not require retail fund managers to disclose that they can lend less than 100 per cent of their assets in any marketing or investor communications, other than buried in the full prospectuses that are typically 100 pages.
“I am not against the practice of securities lending if it is done in a conservative fashion, is in everybody’s interest and helps the return of the fund,” said Alan Miller, founder and CIO of SCM Private. “But [investors] should be allowed to know the amount, who the people are that are borrowing their savings as well as what exactly is being deposited against those savings and, quite simply, an investor is not provided with that information."
The IMA says that there are detailed rules from the Financial Services Authority (FSA) on the UK stock lending market in order to mitigate any risks, such as approvals for terms, authorised counterparties and approval and treatment of collateral. “The IMA are happy with the level of disclosure required by the FSA,” Patterson said.
In response, Miller said that “the IMA continues to condone very poor transparency of charges, investments and risks by its members. The IMA does not seem to agree with Donald Kohn, external member of the Bank of England’s [Interim] Financial Policy Committee, who has called for greater transparency among financial institutions, instruments, and markets, and for institutions to provide timely, up-to-date, and comprehensive information”.
What prompted Miller to conduct the research, was increased regulatory scrutiny of exchange traded funds (ETFs), which have been in the spotlight as both the European Securities and Markets Authority (ESMA) and the Australian Securities Investment Commission (ASIC) have issued guidance which, among other things, recommends explicit disclosures of securities lending practices for those specific products.
But Miller claimed the FSA appears to take this seriously within just synthetic ETFs, having seemingly completely ignored the similar risks within physical ETFs, mutual funds, structured products and the financial spread betting industry.
“If the FSA is suddenly going to start regulating products on the basis of whether investors
can understand them, one would have thought the FSA would take it very seriously that those
funds should provide the information to investors so they can be aware of and able to analyse
the risks involved,” Miller added.
Another concern highlighted by the survey is the lack of transparency in how fees earned from securities lending business within the fund is split with investors.
“You would expect there to be some justification for the split of fees between company and investor, as the investor normally takes 100 per cent of the risk,” Miller said. “The rules basically allow the majority of such fees to be kept by the stock lending agent and the fund manager and the minority of it passed on to the client. Why should there not be a prescribed minimum amount which is
passed on to the fund investors?” Miller says.
He noted, however, that there are good examples of fund managers engaging in securities
lending, such as T. Rowe Price and Vanguard in the US, passing on the vast majority of the fees back to investors.
SCM Private does not directly take part in stock lending, but through its investments in exchange traded funds is exposed to stock lending within some of these funds. However, Miller noted that this does not take place within the synthetic ETFs which it holds as the securities lending by the banks running these funds is normally outside the ETF.
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