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FCA warns preference share issuers amid Aviva fallout

Financial Conduct Authority chief executive Andrew Bailey says any issuer considering cancellation needs to be wary of market abuse rules.

 
FCA warns preference share issuers amid Aviva fallout
 

Financial Conduct Authority (FCA) chief executive Andrew Bailey has written to issuers of preference shares, warning them to be wary of market abuse rules if considering cancelling the investments.

Bailey's intervention follows insurer Aviva's controversial announcement last month that it planned to cancel its high yielding preference shares at par, which sent the shares tumbling.

The insurer was eventually forced to back down after a backlash from retail investors, fund managers and MPs. The shares have since recovered some of their losses.

Aviva's move has had a knock-on impact on the wider preference share market, with most now trading at lower levels amid investor wariness.

One of the few preference shares to have recovered all of the losses incurred following Aviva's move is that issued by insurer Ecclesiastical, which was quick to reassure investors it had no plans to follow Aviva's lead and seek to cancel them. But other issuers have not clarified their position.

In a 'Dear CEO' letter, Bailey warned preference share issuers they needed to consider whether any plan to cancel preference shares constituted inside information.

'Inside information must be announced as soon as possible unless there are grounds for delay and must not be disclosed selectively or privately to individual investors,' he said.

He urged issuers to ensure investors had access to the original terms and conditions of the shares, any changes that had since been made, and a detailing of how shareholder votes would be conducted. 

Among the controversial aspects of Aviva's plan was the nature of the vote on its proposals.

Prospectus documents for Aviva preference shares stated they 'will not be redeemable, save with the approval of the holders'. 

But the insurer claimed it was seeking to 're-pay' them under a 'reduction of capital', which was 'a different mechanism under law to redemption'.

Aviva said this would be put to a vote, not just of preference shareholders, but all investors. This meant ordinary shareholders would have sealed the fate of Aviva preference shares, while Aviva would have been able to wave through cancellation of preference shares issued by its General Accident legacy car insurance subsidiary, as the sole ordinary shareholder.

Bailey suggested issuers publish a Q&A for investors, outlining whether shareholder rights could be changed, or the preference shares cancelled at below the market price, without a shareholder vote, and whether the issuer had any plans to attempt this.

He urged them to consider 'whether there is a risk that the prevailing market price of any of your company's shares or other signals from investors suggest that there is a lack of understanding over the terms and conditions of those shares and/or your company's intentions regarding them'.

'The FCA wants to ensure investors have access to the information they require in order to properly assess the risks and rewards attaching to such shares.'

3 comments so far. Why not have your say?

Nicholas Blake

Apr 19, 2018 at 09:23

The FCA ought to have done this long ago. The announcement is tantamount to an admission that its former guidance/rules were too lax. It might just be that it is it which is at fault rather than the issuers.

I expect most of the issuers of the 'financial' pref's 'irredeemable' pref's to clarify that they are repayable at 100% subject to a court scheme but not class meetings -- in other words those were the terms all along!

And my read of the letter is that issuers are entirely entitled to state that they have no present intention of repaying at par but that they will make a statement if that changes. The Takeover Panel would treat such statements as kicking them into touch for six months.

There must be a real risk, though, that any affected pref's will drop significantly on such announcements.

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PaulSh

Apr 19, 2018 at 09:24

Not a hauling over the coals or even a slap on the wrist, that was a green light "as long as you tell everyone".

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Letapt

Apr 19, 2018 at 14:46

FCA seems to be offering more protection to banks than to their customers and investors.

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