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UK rules out mandatory membership in investor fora

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Institutional investors should not be forced to join collective engagement bodies, such as the investor forum proposed by the Kay Review on long-term investing, as mandatory membership could damage any forum’s credibility, the UK government has said.

The Department for Business, Innovation and Skills (BIS) questioned whether a revised draft of the Stewardship Code should include a proviso that investors must join a collective engagement body.

“Existing investor bodies for collective engagement, and any new forum that is created, rely on a well-informed and highly motivated membership to operate effectively,” BIS noted in its response to a parliamentary committee report on the Kay Review.

“We are therefore concerned such a provision would encourage investors to sign up to such fora simply to ‘tick the box’,” it added, “thereby potentially damaging the quality and credibility of the fora without improving the quality of the engagement.”

The department voiced similar concerns when explaining why it did not agree with setting quotas for membership of the Stewardship Code, overseen by the Financial Reporting Council (FRC).

“We worry about setting specific targets for levels of sign-up to the Code, which risks a tick-box mentality at the expense of genuine commitment to stewardship,” it said.

The response added that signatories already covered most large asset managers, accounting for around 40% of the UK equity market.

“With such a significant proportion already signed up to the Code, government action now needs to focus instead on ensuring lasting improvements to the behaviour of market participants,” it said.

It also added that pension funds could still be subject to mandatory disclosure requirements, forcing them to publish “the nature of their commitment to the Stewardship Code on a ’comply or explain’ basis”.

Christine Berry, head of policy and research at ShareAction welcomed the government’s plans for greater disclosure.

“It’s welcome that the government is considering steps to enhance the disclosure framework for asset owners on stewardship issues,” she said.

“Comply-or-explain relies on scrutiny from below: just as we expect companies to be transparent to their shareholders and asset managers to asset owners, so pension funds should be expected to account to savers for their stewardship activities.”

The response from BIS continued: “However, it is equally important asset owners such as pension schemes develop their understanding of stewardship and their capacity to effectively integrate it into their process for allocating investment mandates to asset managers.”

BIS also suggested that the preparation of a Statement of Investment Principles could be better aligned with the existing Stewardship Code.

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