Kay's future for lending fees has stalled, says committee
06 August 2013 London
Image: Shutterstock
Over a year has passed since Professor John Kay published his report on equity markets—commissioned by the UK government—and the industry has still not changed, say critics.
A House of Commons committee lambasted the government reaction to the report, saying that it is a “huge disappointment” that previous governments have not implemented the recommendations of previous works, “nor have they kept regulation in line with the rapidly changing nature of equity investment.”
One of the key points of Kay’s review was that all income from stock lending should be disclosed and rebated to investors.
The government agreed, and said that it would like to see separate disclosure of stock lending costs and income endorsed by the industry in the context of the development of a more comprehensive industry-led disclosure regime. It declined to give further recommendations, putting any decision off until its progress report in 2014.
Panels that discussed this issue spoke of their unease with current fee standards, as well as the practice of securities lending in general.
Simon Wong, a visiting fellow of LSE and partner in Governance for Owners, said that he had seen in passive mandates that the fund manager is rewarded only through the securities lending revenues that they generate.
“Imagine the misalignment that creates, because that fund manager has much less interest in the value of the fund going up: rather, that person will be more interested in how much securities lending revenue he can generate through that relationship. There are certain things that I would advise against strongly.”
But there were defendants of the sector. BlackRock was asked to respond to the Kay review, and defended stock lending as a well-established and low risk activity that is comprehensively regulated in Europe.
It did not agree that all income should be passed to investors, reasoning that that running these activities represents a cost for the lending agents appointed by the funds.
“Stock lending is a resource-intensive activity,” said Amra Balic, the director and head of corporate governance and responsible investment, EMEA at BlackRock.
“A high proportion of stock lending trades are executed automatically, which requires significant investment in systems and technology ... in our view, paying the lending agent a percentage of the gross revenue generated is the most appropriate way of ensuring alignment between the interests of the investors and the lending agent.”
A House of Commons committee lambasted the government reaction to the report, saying that it is a “huge disappointment” that previous governments have not implemented the recommendations of previous works, “nor have they kept regulation in line with the rapidly changing nature of equity investment.”
One of the key points of Kay’s review was that all income from stock lending should be disclosed and rebated to investors.
The government agreed, and said that it would like to see separate disclosure of stock lending costs and income endorsed by the industry in the context of the development of a more comprehensive industry-led disclosure regime. It declined to give further recommendations, putting any decision off until its progress report in 2014.
Panels that discussed this issue spoke of their unease with current fee standards, as well as the practice of securities lending in general.
Simon Wong, a visiting fellow of LSE and partner in Governance for Owners, said that he had seen in passive mandates that the fund manager is rewarded only through the securities lending revenues that they generate.
“Imagine the misalignment that creates, because that fund manager has much less interest in the value of the fund going up: rather, that person will be more interested in how much securities lending revenue he can generate through that relationship. There are certain things that I would advise against strongly.”
But there were defendants of the sector. BlackRock was asked to respond to the Kay review, and defended stock lending as a well-established and low risk activity that is comprehensively regulated in Europe.
It did not agree that all income should be passed to investors, reasoning that that running these activities represents a cost for the lending agents appointed by the funds.
“Stock lending is a resource-intensive activity,” said Amra Balic, the director and head of corporate governance and responsible investment, EMEA at BlackRock.
“A high proportion of stock lending trades are executed automatically, which requires significant investment in systems and technology ... in our view, paying the lending agent a percentage of the gross revenue generated is the most appropriate way of ensuring alignment between the interests of the investors and the lending agent.”
NO FEE, NO RISK
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