Transparency is a central tenet of any investment decision. It applies equally to the young person saving for their first home relying on a version of the ever popular index tracker, as well as the experienced institutional asset manager who has invested through a sophisticated trust.
When a listed company admits it has misled the market, it seems reasonable that injured parties – be they aspiring home owners or global asset managers – should be entitled to straightforwardly recover losses based on that misinformation.
The reality is that, despite the all-too regular examples of concealed bad practice in large companies listed on UK exchanges, courts and successive governments have yet to satisfactorily address the issue of how investors recover loss, as the Law Commission also recently concluded.
Claims relating to misinformation are usually brought by asset managers, hedge funds, insurers and pension funds, including for and on behalf of retail savers who increasingly invest pensions and savings through benchmark or “tracker” products.
For a large tranche of these “passive investors” in a £7 trillion UK investment industry, the law provides an unclear response to bad practice which leads to shares being overvalued, purchased at inflated prices and held (or sold) at a loss. Defendants rely on unclear statutory words to the effect that individual investors must prove they themselves relied on the misstatement, unlike in other jurisdictions.
Actions by shareholders in relation to corporate cover-ups is primarily provided for by the Financial Services and Markets Act 2000 (FSMA). This was used to successfully recoup losses from the £12bn RBS rights issue litigation of the mid-2010s after a substantial number of shareholders initiated proceedings alleging they had been misled over the state of RBS’s finances.
More recently, Tesco plc asked the High Court in England to throw out the case of institutional investors arguing that they suffered losses on Tesco’s share price following the much-publicised false accounting scandal. This week, Tesco’s request was denied, with the court highlighting the “uncomfortable” gaps in FSMA that mar investors’ attempts to seek redress and the “unsettling” reality that cornerstone legal provisions are still open to such debate.
Threat of action lacks teeth
This, however, does not resolve the continuing uncertainty around the reliance requirements of section 90A of FSMA. Institutional investors, chief among them Legal & General and Aberdeen Standard Investments, are rightly applauded for electing to invest in companies with high ESG (environment, social and governance) scores and creating retail products to this end. While it is hoped this will encourage more retail investors to save for the future, many in the investment community believe that, without legal clarity, the threat of enforcement against bad actors lacks teeth, and only the largest and wealthiest investors who invest on an “active” basis, will benefit.
Investors who have been misled having the ability to straightforwardly seek redress provides an inducement for companies to ensure that published information is accurate, which makes the market work more efficiently and increases returns for all.
Within financial services, regulators in the UK, US, Australia and Singapore have introduced accountability regimes to ensure business leaders have greater personal responsibility. The hope is this will prevent underlying deceit but that is optimistic given such protections principally cover financial services companies and that shareholder claims often originate from the acts of one or two bad apples.
If clarity is not provided by the government, it will be left to the largest institutions with the broadest shoulders to argue the point on appeal in the years to come as, to quote the court in Tesco, “uncertainty is the enemy of stability and reliability in financial markets”.
- Ravi Nayer, partner and financial services disputes specialist at Pinsent Masons.