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FCA: Miss Piggy, you are cleared for take-off

Back in September 2011, the FT ran a story exploring the frustrations felt by investors over complexity and opacity in the voting chain (“Call for clarity in proxy voting process”, FTfm, 12th September 2011). In many ways the article was no different to much of the other hand-wringing that has characterised commentary on this subject. Like many others before it, and a fair few since, it failed to identify the real problem, waylaid instead by highlighting a lack of availability of vote “confirmations” whilst blaming registrars and proxy agents.

However, it did prompt a memorably robust riposte from Paul Conn, President, Global Capital Markets at Computershare (“Don’t blame the share registrars for anxiety over voting”, FT Letters, 19th September 2011). He rightly pointed out the real root of the problem – asset pooling and the effect of the single shareholding structures. He famously quipped “blaming registrars for this is akin to saying ‘my pig would be gorgeous if only we could give him a coat of lipstick’”.

Manifest has also been pretty robust on this – we believe that investors should be better served (and can be). It was the theme of one of our more recent (and popular) articles  – “Checkpoint Charlie” where again we highlighted that: “any number of problems can rear their heads to impede the voting of shares, from opaque pooled accounts, to cumbersome and antiquated registration practices and unnecessarily manual processing of instructions” yet “custodian banks, sub-custodian banks, securities depositories and their appointed voting agents all play a role (and take their cut).”

The Financial Conduct Authority’s “Wholesale sector competition review 2014-15”, (19/02/15), represents a seminal moment for the development of better competition for proxy voting services. Buried in the detail of what is a helpful exposition of competition challenges in many aspects of the investment and wholesale banking industry is the simple statement that “the voting services provided by custody banks have seen low levels of innovation and [pension funds] are concerned that voting instructions might not get accurately executed due to the lack of investment in an automated effective process”.

The report goes on to say that “we consider that there are areas in the procurement and supply of asset management, and related services, where competition may not be working effectively. These include … bundling of some ancillary services and the quality of some services provided.”

For 20 years, Manifest has maintained that as votes are an intrinsic right of share ownership (indeed, an asset), investors should have the right to choose the service provider of their own preference for vote agency, just as they do for other well-exercised rights such as transfer.

Despite being somewhat overdue, the FCA’s paper is extremely welcome. There are many delicate and complicated reasons why the market is not working as it should, which is the primary reason for our objection to ESMA’s insistence on investigating and regulating  proxy advisors rather than enforcing existing custody regulations and investigating the abuses that were reported to them.

It really doesn’t matter that a formal review may only come after the banking review. An important point of principle has been established, the market for shareholder voting is not working and that is bad for investors, bad for companies and bad for comply/explain.

Please, forgive those of us who have been watching this issue for some time if you see us glued to our windows, looking out for flying pigs. And don’t think you’re being conned if you see the pigs wearing lipstick.

What do you think?