Readers who take any notice of financial affairs will be aware of the furore over the threat by Aviva to redeem their preference shares by a “share cancellation” process – they claimed that is a different legal process, even though the shares were described as “irredeemable”. The shares concerned dropped in price to a significant extent because their high coupon interest rate meant they were trading at a premium when cancellation would have meant redemption at the original par value. Aviva have reconsidered the matter, but the interesting aspect today was a response from the Financial Conduct Authority (FCA) to a letter from the Treasury Select Committee. You can read it here: https://www.investegate.co.uk/financial-conduct/rns/fca-response-to-tsc-on-aviva-plc-preference-shares/201803280704471964J/
It basically gives lots of reasons why they cannot yet respond to some of the questions as they are still looking into the issues, but in response to Question 4 they seem not to concede that they should be involved in “the resolution of the legal questions”. In other words, they would be quite happy to leave it to an enormously expensive law suit by investors to resolve the key questions.
They do not seem to accept that they have an overriding objective to ensure a fair market for securities and that investors should not be prejudiced by small print, concealed or opaque legal terms and other sharp practices.
The response to Question 6, seems to try and excuse the problem by saying the shares were issued more than two decades ago and the FCA has taken subsequent action “in order to restrict the retail distribution of regulatory capital instruments….”. This is surely not an adequate excuse. The shares concerned were and are publicly traded and there is nothing stopping any investor (at least a “sophisticated” one) from trading in them. But even sophisticated private investors and some institutions were caught out by the unexpected threat from Aviva.
The FCA is again proving to be toothless in the face of seriously unethical practices. In other words, they are not doing their job competently and should be reformed in my personal opinion. I believed the FCA adopted an objective of more “principle-based regulation” a few years back but now seem to have abdicated that responsibility and are quite happy to let lawyers argue over the wording of a prospectus while ignoring the ethical issues. Just as they did with the RBS and Lloyds cases. It’s simply not good enough to issue the kind of response they have to the Treasury Select Committee.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
Are prefs now limited to sophisticated investors? I’m sure they weren’t when I invested in RSAB – which I believe to be similar to the Aviva prefs: I certainly wouldn’t have qualified! Nor when many other buy-and-hold private investors invested in prefs.
I think that implies some of these shares are in the hands (or ISAs/SIPP) of unsophisticated investors.
I think the FCA’s thrust is that it’s not for the government and its creatures (in this case the FCA) to interpret the law – that is always the business of the judiciary. Hence testing in court is the correct way forward.
In this respect the UK differs from such as Russia and Turkey.
In response to John Wigglesworth, the FCA is the regulator as enabled by an Act of Parliament with responsibilities that include ensuring a fair market and in particular that retail investors are treated fairly. They effectively make and interpret the law as regards what is permissible for anyone who operates in the financial markets including share issuers. The FCA should not be ducking its responsibilities.
As regards the question of who could buy preference shares, it is clear that many ordinary retail investors have purchased them in the past. If you are an “advisory” client of a stockbroker then they should be considering whether you are a suitable person to purchase them. For execution-only clients it would appear that anyone could purchase them (the Aviva Prefs are listed as possible purchases in my ISA on a well known platform). At least that is my understanding of the position but if anyone knows better I am happy to be corrected. I worded the original blog post ambiguously because I was not sure on this point.
Roger – thanks for your reply. Fair market and fair treatment of investors – I agree, absolutely. But that’s a separate matter from the legality of the process (of cancellation/redemption).