Mick Gilligan’s excellent regular blog on investment trusts raises a subject that is close to my heart this week – the way in which private, retail investors are disadvantaged by complex rules set up, allegedly, to help them by the regulators, the FCA.
I find the overly bureaucratic, legalistic regulatory approach used in the UK to be cumbersome and not fit for purpose. It says it’s there to protect us, the poor private investor, but when egregious scandals occur (we can all name a long list of ignored mishaps), its usually way behind the curve.
But when it comes to officious paper shuffling, its on the ball. Take everyone’s favourite useless documents, KIDs. These utterly pointless and completely unread documents must still be put together by listed investment companies even though I have never met anyone who has
- Voluntarily read one
- Then found them useful and
- Thinks they serve a purpose
The AIC quite rightly has taken aim at them and if you haven’t already its excellent paper on the subject – available here and entitled Burn Before Reading – do so now. These documents are supposed to provide clear and useful information about risks and rewards of investing in funds. In reality they are pointless.
Gilligan at Killik & Co has another target in his sights: the simply ludicrous rules which stop private investors from investing in secondary placings. The event which has prompted his attention is a new placing by the excellent INPP Infrastructure trust. Here’s Mick’s excellent summary :
“Capital raises cannot be made available to retail investors without the issue of a full prospectus. The last time that INPP carried out a capital raise that allowed retail access was back in 2017. This permitted the company to raise up to £300m initially and up to a further £450m via ongoing issuance programme. However, the prospectus that was required to facilitate this capital raise ran to 248 pages !
One argument in favour of a full prospectus is that it helps to provide greater safeguards and risk warnings for retail investors. But let us be honest – how many people are going to take the time and trouble to wade through 248 pages of legalese? And here is the big incongruity. INPP shares trade at 167p as I write, and it is ok for retail investors to buy the shares in the market at this price, but it is ‘not ok’ for them to buy the very same shares 2p cheaper via the placing, at 165p. There is clearly something wrong here. Several parties recently wrote an open letter to the Treasury, arguing the case for allowing retail access to IPOs. We agree wholeheartedly. But we also think the Treasury should look at levelling the playing field for retail when it comes to secondary placings.”
I would add another related grouse of my own to Gilligan’s: the specialist funds segment which is a kind of nursery slope for more alternative funds. It was set up to target more specialist alternative funds where a full listing might not be appropriate i.e it might have related party issues. That means its only really for sophisticated and professional investors.
Except it isn’t. Plenty of funds use it and, more to the point, plenty of private investors can buy the shares in these funds on the secondary markets. But because of the ludicrous rules in place, these private investors CANNOT access main, primary IPOs and listings on the SFS. Thus the big institutions pick up the shares at a discount in many cases and then sell them at a profit in the secondary market to private investors who have to wait in line. This disadvantages the large number of smart, well informed private investors – many of whom actually work in some part of finance or business – who can’t tick all the regulatory boxes. Primary Bid is trying its hardest to broaden access to this specialist market via some of its programmes but that is nowhere near enough.
I spy two core regulatory failings. The first is that disclosure say via KIDs and prospectus is a proper protection for private investors. It isn’t. What matters is educating investors and making sure that regulated firms stick to the rules and behave ethically. Disclosure serves a valuable purpose of course but I’d bet that the vast majority of investors never read anything more than a few pages of a full prospectus plus the regular monthly fact sheet. If that.
The other failing is the presumption that all private investors are one solid mass. This allows the regulators to pigeonhole retail as ‘sheep’ who need to be protected. But this approach ignores the huge variety of skills and knowledge sets amongst the private investor base. Some really are ‘sheep’ but many are probably as smart and as sceptical as any financial professional.
In my cynical moments I almost think there is a deliberate policy by the FCA to force retail down a simplified channel which forces them to make use of large institutional fund managers who can offer heavily marketed mainstream funds or unit trusts. I also sometimes suspect that the FCA doesn’t even really like investment trusts per se and thinks they are too clever for private investors. Maybe that’s just me being cynical….