Its Not Harry

Comment and opinion for retail investors in the UK

Mark Potter

Monday Mashup – toothless regulators

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This week I am not writing about the investment markets, but the system of retail investment. We all have a risk if the people we give our money to negligently mis-manage it or even run off with it. There are systems in place that are supposed to protect us in a country with a highly developed financial services industry, but do they work?

Covering all angles

I will start with an allegorical situation. I own a house in a country where burglaries are reportedly (from the insurers) less common than in England, but as I live in a remote area I have a good electronic security system, pay a modest sum to a security company to send out 2 armed employees promptly if it is triggered and as a backstop have a normal house contents insurance (with a discount because of the security arrangements).

Here I am training and improving my CV ahead of applying for a job at the FCA

It all works – I know because I accidentally triggered a smoke detector in the small hours and had 2 large uniformed guys appear and ask me for ID docs and my password! I suppose you can get burglars in pyjamas!

I tell you this because that is how the retail investor buying funds ought to be protected in the UK – with proper security systems that respond

We pay for our own protection

Our money goes into OEICs, which are run in line with a prospectus and have an ACD (authorised corporate director) who is charged with making sure the securities are looked after and the fund manager behaves. That is the first line security system. You pay for it directly in your fees.

There is also the FCA (the regulator or response force). They are supposed to understand the market operators, monitor them, identify risks and discipline or even close down bad actors You pay for it indirectly in your fees.

Then there is the last resort insurance policy – the Financial Services Compensation Scheme. This is widely used as a ‘catch all’ to make up for all the bad practice that the FCA failed to notice. If you think adviser fees, bank charges and insurance premiums have gone up a lot lately, one reason is to pay for the escalating cost of FSCS levies – so you maybe pay for that too.

The Woodford case

In the case of the Woodford Equity Income fund, it appears that Mr Woodford was able to invest outside of the stated objectives of his fund and in breach of the FCA rules. Other industry practitioners could see that was happening and it was reported by specialist journalists. The ACD must have known it was happening, The FCA should have known it was happening.

The security system and regulation failed. Investors who are annoyed (understandably) are suggesting that they will sue financial advisers and Mr Woodford’s firm (not much use if it is closed down). Who is holding the ACD and the FCA to account?

The FCA are in my direct personal experience incapable of acting on specific warnings of potential fraud. The ACD model is being challenged by some who point out that the European SICAV model would offer better protection. But of course we are supposed to be having a bonfire of regulations post Brexit! If that happens, then it will be truly ‘caveat emptor’ – buyer beware. The current system frequently fails, but it is better than no system at all.

Watching Brief – November 2019

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Pottering About

I have recently been so bold as to try and define the Conservative government strategy on Brexit and their potential to govern in practice.  I was right to suggest that a General Election was their principal objective, ideally post Brexit with the public not contemplating remain or second referendum issues, but they failed to achieve the October 31st exit.

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Monday Mash Up – Stalled Saturday and Grumpy Trumpy

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I have decided not to carry on numbering these posts as that would not be very helpful if anyone (including me) wants to search in the history for a particular rambling or rant in the future.

Brexit again

It now makes sense to keep a daily watch on developments and market reactions, especially the direction of the FTSE250 (easily checked on the BBC web site, Business/Market data).

Although a deal being approved by Parliament is in reality only a small step, because the transition period is likely to end without Britain having a new trade deal with Europe and there will be another cliff edge, the markets will be looking for the real Johnson objective to be satisfied (the General Election being called).

As only a contrarian (and one more contrarian than me!) would predict anything other than a decent Tory majority, I would suggest that markets will take that as a positive development. Rather paradoxically, as there will be economic negatives from Brexit, the government and central bank reactions are highly likely to be stimulus by money printing and borrowing. In the short term that is good for bonds.

I will write a longer piece about why I am interested in Corporate Bonds after a long period of ignoring them. But a Brexit deal and an election will possibly also be good for certain equities, so be prepared to dip a toe in the water of the UK Smaller Companies sector and maybe look at some recovery or opportunity funds if you have plenty of cash.

The Incredible Sulk

Not my invention, but the moniker used for POTUS Trump by the Guardian’s political sketch writer.

A few years back, I had the unpleasant experience of trying to deal with someone who I eventually worked out had narcissistic personality disorder. Such people, mainly men, are surprisingly common, I have since found out. Having had that experience, I can to a large extent predict or at least understand how dear Donald will behave.

Such people will swear black is white, will deny that what they said or wrote yesterday is in any way a given fact and generally do anything to preserve the perception they have of themselves as being faultless and adorable. They have trouble believing that anyone could doubt their superiority and deal with it by rubbishing any opponent aggressively because they really believe that such morons and weaklings must be inferior as they have not appreciated the genius of the great one they are trying to criticise.

Academics suggest such people frequently rise to the top in business, politics and the entertainment industries. I bet you can name one or two!

How can such people be stopped from causing chaos and damaging other innocent people? The answer, I found out, is to present them with a situation where they can see that their reputation with be destroyed, given the absolute nature of the facts and the failure that will be attributed to them.

Is it possible Donald Trump is not perfection itself?

That is why Mr Trump withdrew his proposal to have the G7 meet at his resort in Florida, quite quickly. It was not that he was worried about the conflict of interest accusations – he knows in his own mind that they don’t count much with the public – in fact the sort of people who vote for him admire someone who can make a quick buck, in any way. That he has made clear quite often: morality does not matter to such people.

What he was scared of was the resulting publicity that revealed this was a failing business venture, big time – fact. He can’t get round that, even admit it to himself. Reading it is very painful, so he withdrew his proposal to remove the focus.

Why do I make this argument? Because in the end someone will unravel everything about his Presidency with a wall of facts – probably to do with tax. When that happens, the global economy will heave a sigh of relief.

Boris’s plan matures

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I wrote at the beginning of the month that Boris Johnson was going to maximise his chances of winning an election and I have to hand to him and his team – he has done it with some skill.

Off we go – Happy Halloween!

He has done what most English people I know think was necessary – tell the DUP that he can do without them if they are not going to offer any flexibility. That has allowed him to cut a deal and the fact that to do it, he made modest concessions will not do him any harm as most people are now just longing for the end of the process. The Europeans seem happy with it too.

He can put it to Parliament not really caring if they reject it – a rejection will now be seen by the majority of the British public and the right wing press as churlish and the EU heads of state will give up on the British democratic process.

If the deal is passed (which I think is the lesser probability without a big block of Labour MPs disobeying their Whips), then all well and good and although the path ahead is not easy, at least everyone at lasts knows that they can make a start.

If the deal is not passed, the PM will write a letter requesting an extension, but the EU will refuse it, in my judgment and I think in the minds of his advisers. I think the Tory stategists have always seen this as the ultimate scenario.

They (EU representatives of all sorts) have pretty much said that much in advance. If the only reason this hard fought deal does not go through is Parliament, then in their view no deal will ever go through so what would be the point of yet another extension.

I fear the short term consequences of a No Deal Brexit, but only because of the lack of a transition period. Most elements of the withdrawal agreement will have to be negotiated in other ways in any case. Planes must fly, people must travel, food and medicines must move. These are not optional. It is the likely chaos of sorting things out quickly that is a concern.

Leaving with a deal and a transition period will I think see a decent bounce in the price of UK and European shares. Leaving with no deal will have effects I really can’t predict, but I would be pessimistic.

Whatever happens, Boris will look to be the man who tried hard, Parliament will look at best foolish and at worst in need of wholesale changes. I think that will mean an election will see return of a Tory government with a big majority. I hope it is one that is really as ‘one nation’ as Boris claims he is.

Note that this an attempt at an objective assessment, not my personal approval of what has happened! As an investor, one has to put one’s own politics to one side and for the most part live with the politics of the markets.