The research was carried out among 20 UK retail fund managers, 19 of whom, accounting for a combined £241bn in assets, are allowed to lend up to 100% of clients’ funds. At least half of them, managing £143bn, had participated in stock lending – though there is no suggestion that all £143bn has been lent.
Another find from the research was that on average just 66% of the gross income derived from stock lending was retained by the fund after fees although investors potentially bear 100% of the risk. Only 7 of the houses surveyed specified the split of fees between the fund and the fund manager/stock lending agent within their full prospectuses.
The firm’s conclusion is that “levels of disclosure, transparency and protection within current legislation are totally inadequate.”
SCM Private makes five recommendations and calls on the regulator to require fund managers to reveal:
- risks associated with stock lending in factsheets and other marketing materials;
- the total exposure to stock lending by funds on a daily basis;
- the names of the largest counterparties by fund on a daily basis;
- the breakdown of the actual collateral received by the fund on a daily basis;
- the percentage of the gross stock-lending income retained by the fund rather than the fund managers and/or the stock lending agents.
Commenting on the research, Gina Miller, co-founder of SCM Private said: “We believe that many investors will not be aware that certain retail funds are legally permitted to potentially risk 100% of their savings through stock lending. Clear and full disclosure regarding stock lending should be mandatory to protect investors.
“In our opinion, the minimum levels of disclosure and protection for retail investors contained within UK legislation are totally inadequate. SCM believes that the FSA needs to address the key issues of risk and transparency across the whole retail investment industry so retail investors can make fully informed educated decisions. ”
