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A lang cat production for The Transparency Task Force



Could transparency be the secret to driving velocity in large organisations? P8

How fair, sustainable and transparent are public sector pensions? P4 Tacking facts and fiction in valuing DB schemes P12 The inequalities of Northern Rock P15 The Foreign Exchange Team’s response to the Global FX Committee on last look practices P22

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3 Hello from the Editor 4  Public sector pensions: are they fair, sustainable and transparent? 7 The Transparency Task Force Teams 8  Will opaque organisations have the velocity to see out the decade? 11 Platforms or asset managers. Where does the problem lie? 12 About our primer on the risk structure and contractual accrual rate of DB pensions 14 Transparency Statements 15 Northern Rock: the realities 18 The Directory of Pro-Transparency Organisations 22 The Foreign Exchange Team’s response to Request for Feedback on last look practices as requested by the Global FX Committee


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Hello from the Editor This month I continue with my coverage of the Transparency Task Force Teams and some of the amazing people involved. In the September edition I covered the Banking Team, Foreign Exchange Team and the Market Integrity Team. In the October edition I discussed the Scams & Scandals Team, Team GTI (Global Transparency Index, previously called the International Best Practice Team) and Team PISCES. This month we’ll take a look at the final three teams.

The Costs & Charges Team Transparency on costs and charges is so important because it will encourage a more competitive market and thereby generate better net results to savers and investors, particularly pensions savers. The highlight for this team so far was a very special meeting held at the House of Commons in September 2016 and Co-Chaired by Tom Tugendhat MBE MP. The event was the first ‘Transparency Strategy Summit’ in the world, and dealt with the question: “What can we collectively do to help protect the UK’s pension savers from hidden costs and charges?”. We presented our research on costs and charges which was even mentioned on the front page of the Financial Times. The team is led by Ralph Frank, who is Co-Head of DC at Cardano and an Ambassador of the TTF. The team continues to campaign for greater transparency on costs and charges through all relevant UK regulators and government departments. In particular, Ralph is working with the Financial Conduct Authority (FCA)’s Institutional Disclosure

Working Group (IDWG). The IDWG is Chaired by Dr. Chris Sier, a long-time campaigner for transparency who, along with Con Keating at Brighton Rock Group, played a key part in helping to get the Transparency Task Force up and running.

Team PAM The P is for Progressive; the A is for Asset; the M is for Managers; so, Team PAM is for asset managers with a progressive outlook. The overall purpose of this community is to facilitate collaboration between asset managers that have a more enlightened and clientcentric approach. The team was launched on 5 July 2017 at our Transparency Symposium dedicated to the FCA’s Asset Management Market Study, Final Report. The Final Report was highly critical of many parts of the asset management sector. However, it would be completely wrong to assume that all asset managers operate in the manner that the FCA criticised. In fact, many are highly transparent and client-centric. These are the organisations that are leading the way and they are already wellsuited to the post Final Report era. They welcome the regulatory activity that is underway because they are aligned with its overall purpose – to create a fair, efficient and competitive market that will provide better value for money for savers and investors.

Financial Stability Team The Financial Stability Team was launched on 13 September 2017,

Andy Agathangelou Founding Chair, Transparency Task Force

at a Transparency Symposium held in London entitled “It must never happen again!”. The event was all about the causes and consequences of the Global Financial Crisis and in particular the part that a lack of transparency played. The date of the event was chosen because it marked the 10-year anniversary, to the day, that Northern Rock collapsed. The Financial Stability Team is working together to establish what more can be done by governments and regulators around the world to build greater resilience into the financial ecosystem. This is important work because the overall conclusion from our 13 September event is that despite the fact that we are ‘10 years on’ from the Global Financial Crisis there are many risks that have still not been fully mitigated. We want to shine a light on that, in a collaborative, constructive and consensus-building way. The team is led by Leandros Kalisperas and will present a White Paper entitled “Ideas to help reduce the chance of another Global Financial Crisis” on 7 February 2018 at the House of Commons.

Don’t stand by, stand up. We’re always on the lookout for collaboratively-minded people that want to work with us to help fix what’s wrong in financial services. To get involved please contact me through andy.agathangelou@ transparencytaskforce.org Huge thanks to our Team Leaders and our 250+ valiant volunteers for what they are doing.

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Public sector pensions: are they fair, sustainable and transparent? ALLAN MARTIN | DIRECTOR, ACMCA

Background Most public sector employees are members of defined benefit (DB) pension schemes. Most private sector employees used to be members of DB pension schemes but most employers have now closed the door to new members and/or continued benefit accrual. Why? Simply because of the cost and future risks. Many private sector DB pension schemes also have huge funding deficits – BHS was just one recent example. In contrast, most public sector pension schemes are unfunded including those for the civil service, the NHS, teachers, armed forces, police and fire services.

Just how significant are our unfunded public sector pension promises? Very significant. A few statistics include: • At March 2015 the capital value published in the Whole of Government Accounts was very close to £1.5tn (£1,500bn, £1,500,000m). This might be termed ‘Your other National Debt’. For a test of transparency, just ask how many friends or relations are aware of this figure. • Over 6 million public sector workers were involved and the direct livelihood and protection of easily another 6 million family members are involved. • The pension benefit is the biggest ‘benefit in kind’ for most employees, public sector included, and the promises are contractual.

How are benefits and contributions calculated? This is technical I’m afraid and definitely not public

knowledge. However just like other interest rates e.g. these numbers are very important – you, your children and grandchildren are picking up the tab. The employee and employer contributions and benefits are calculated using the SCAPE interest or discount rate (Superannuation Contributions Adjusted for Past Experience). Heard of it before? The SCAPE discount rate is arguably the most important assumption in UK pensions. It is also arguably the least appreciated and certainly not one ever qualifying as transparent.

The history of SCAPE The SCAPE discount rate was significantly reduced in 2011 from RPI+3.5% to CPI+3% – the lower rate


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meaning higher contributions and lower benefits. This change was made at the same time as the major benefit and contribution review1 2 3 undertaken by Lord Hutton. These reforms involved new career average revalued earnings (CARE) benefits for many younger members and coincided with the move from RPI to CPI indexation (worth around £100bn in capital value terms). Transparency is limited to a few MPs, a few HM Treasury officials and a small number of pension professions.

fire service budget may have a 35% first charge for pensions compared to the current 25% first charge. Unless total government revenue is increased (higher taxes) the department expenditures will have to be managed down via headcount and/or service reduction. Suggested cuts in police budgets have already invited the question – “Which crimes won’t we investigate in future?” Other tabloid headlines might include – “Guaranteed future austerity”!

The SCAPE rate was further reduced to CPI+2.8% in March 2016. In setting the rate HM Treasury, with a public consultation and advice from the Government Actuary’s Department considered that the rate should represent a fair assessment of costs4 and protect government income, i.e. its tax base, which in turn is largely dictated by growth in gross domestic product (GDP)5. Transparency on this point involved a Freedom of Information Act request.

What has been the actual experience?

Why is this an issue for fairness and sustainability? Any shortfall between actual UK GDP growth and the assumed SCAPE discount rate basis will simply add disproportionately higher pension payments to future government expenditure. The problem is not the monetary increase but the pension proportion of overall department budgets. For example a future


GDP growth has been somewhat challenged since the financial crisis and that looks set to continue. Net migration, real wage growth and productivity all affect GDP. The March 2016 SCAPE adjustment reflected input on GDP growth from the Office of Budgetary Responsibility (OBR). Numerous downgrades of future growth have followed since from the OBR and the Bank of England. The graph below shows how the last 10 years of GDP figures compare with the prescribed or assumed SCAPE discount rates. In actuarial pension fund valuation terms this is equivalent to the ‘analysis of deficit’ (or analysis of surplus if you remember the 1980s!). These coupled with the projected figures for the next 5 years suggest significant and guaranteed pressure on government department budgets in future.

GDP: Year-on-year growth, % above CPI


GDP: Year-on-year growth: CVM SA % ACTUAL





3.5 3 2.5 2 1.5 1 0.5 0 2007 2008 2009 2010

2011 2012 2013 2014 2015 2016

What does that mean in £ terms? Noting that the UK has approximately £1.5tn6 7 of unfunded public sector pension promises, a 1% funding

or GDP growth assumption shortfall in any year equals £15bn. Whilst the 2008-09 financial crisis may be considered an exception, the GDP reversal is history and the effects won’t disappear. For the last decade, it

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is not difficult to pencil in a few more £15bn shortfalls (like 20) falling to generation Z and their families. This regular annual shortfall looks set to continue. This future burden is surrounded by ignorance. Alternatively, if benefits and contributions were based on the actual growth achieved in the economy over the last decade, it is not difficult to envisage massive increases in employee and/or employer contributions and/or significant reductions in benefits. (The 2016 adjustment equates to £2bn per annum and this is due to take effect in 2019 with an increase in employer contributions – that is quite a few jobs and/or quite a few services.) All (national) debts have to be serviced and repaid (and even if rescheduled they still have to be managed). May I just invite comparison between (1) negative real interest rates for conventional government debt (ILGS) and (2) the CPI+2.8% assumed return for contractual government pension debt. The former is widely appreciated in economic and financial circles but is arguably economically unsustainable – even before consideration of QE unwind, ongoing budget deficits and maturing gilt rescheduling. The latter is appropriate reward for hugely important and often unappreciated public service but is totally unappreciated, opaque and one that demands to stand the test of time and fairness to Generation Z.


A comparison with some Mediterranean countries unmanageable national debts may be premature, but all Greek tragedies start somewhere!

So are these current pension promises fair, sustainable and transparent? Fair? Yes – in that hard working and frequently undervalued public servants deserve a defined benefit (DB) pension promise. Sustainable? No – in respect of the promised amount and the burden currently being transferred to future generations. Sooner or later politicians and voters will notice! Transparent? Definitely not. Aside; Additional notice might be expected on the differences in revaluation of the new post 2015 CARE benefits earned each year. The new pension fractions ranging from ~1/42 (civil servants) to 1/61.6 (Scottish firefighters) involve revaluation in line with CPI and national average earnings (NAE) respectively (1% and 2.6% awarded for 2015-16). Any readers with fond memories of traditional 1/60th DB pension schemes (NB. before the effects of increasing longevity and QE) may speculate that poorer revaluation is the obvious price for a higher pension fraction. At least a few younger public sector scheme workers have also speculated on the average age of the pension scheme negotiators!

1. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/81610/consult_unfunded_pension_condoc.pdf 2. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/220809/consult_discount_rate_summary_responses.pdf 3. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/220810/foi_pensions_consult_response_individual.pdf 4. Freedom of Information Request; Correspondence dated 23rd March 2011 between The Government Actuary and H M Treasury. 5. Freedom of Information Request; Correspondence dated 14th March 2016 between The Government Actuary and H M Treasury. 6. Whole of Government Accounts 2014-15; https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/525617/WEB_whole_of_gov_ accounts_2015.pdf 7. Whole of Government Accounts (March 2016) capital value £1.42tn due to slight drop in bond yields March 2015-16. March 2017 figure likely to exceed £1.6tn.


Allan Martin is an actuary and independent pension scheme trustee. After a traditional career in established consultancy firms he set up his own consultancy business, ACMCA Limited, in 2002. He now proudly claims to be North Ayrshire’s leading (= only) consulting actuary and independent trustee, overseeing nearly £5bn’s worth of public and private sector pension promises. Usual, but necessary professional caveat; no aspect of the foregoing should be taken as actuarial or investment advice. All the above comment is personal and not representative of any public or private sector pension scheme, employer or other organisation that I am connected with. Contact – 07714 064964 or via allan@acmca.co.uk


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The Transparency Task Force Teams The teams are the Transparency Task Force’s collective response to what we see across the global financial services industry that needs to change. We firmly believe that those who can see problems, admit to them and are motivated to tackle them should collaborate to put things right. It’s in everyone’s interest to do so. The Transparency Task Force teams are less about individual experience and more about understanding the potential power of working together to drive much needed change.




Improving transparency and professionalism.

Foreign Exchange

Challenging the opacity.

Market Integrity

Championing ethical practices.

Costs and Charges

Helping investors access better value for money.

Stewardship and Decision Making

Working to correct the ‘asymmetry of information’ problem.

Scams and Scandals

Raising awareness to help shut them down.

Global Transparency Index

Mutual learning to inform the Global Transparency Index.


Purpose, Impact Investing, Sustainability, CSR, ESG and SRI.


Progressive asset managers working together.

Financial Stability

Working to mitigate the risk of another Global Financial Crisis.

If you want to make your opinion count by joining our 250+ strong group of volunteer team members, contact andy.agathangelou@transparencytaskforce.org for more information and details of the monthly conference calls.

The Transparency Task Force Ambassadors While we value every member of our campaigning community, some go over and above. They are particularly aligned to our cause and, as such, are profoundly impactful for positive change. They are our Transparency Task Force Ambassadors. Name




Jackie Beard

Director of Manager Research Services EMEA Morningstar Europe Ltd

JB Beckett

UK Lead

Association of Professional Fund Investors


Steve Conley

Chief Executive

Values Based Adviser


Ralph Frank




Ian Fryer

Head of Research

Chant West

Daniel Godfrey


The People’s Trust


Catherine Howarth Chief Executive



Con Keating

Head of Research

BrightonRock Group


David Pitt-Watson

Excecutive Fellow

London Business School


Robin Powell


The Evidence-Based Investor


Paul Secunda

Professor of Law and Director, Labor and Employment Law Program

Marquette University Law School


Anna Tilba

Lecturer in Strategy and Corporate Governance

Newcastle University Business School




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Will opaque organisations have the velocity to see out the decade? Survival tips from the ones wearing the running shoes. JOHN ROSLING | CEO, CONTEXIS

Transparency is an attitude of mind and it could be the secret to driving velocity in large organisations. It starts with an understanding of purpose. There’s an old story about two hikers who are confronted by a large bear in the woods. One calmly sits down, removes his boots and puts on a pair of running shoes. “What are you doing!” his panicked friend asks, “you’ll never outrun a bear.” “I don’t have to” he replies, “I only have to outrun you”.

90% of CEOs don’t believe their business is moving fast enough to adapt to the changing world they face

I was reminded of this when reading that 90% of CEOs don’t believe their business is moving fast enough to adapt to the changing world they face. Whilst they may be right, it may not be as bad as they fear. In most cases they only need to go faster than the other guy. It’s therefore worth asking who is wearing the running shoes in your industry. Which are the agile businesses you face, and what are they doing that you are not?

The answer tends to be the businesses that are instinctively innovative, open to new ideas, driven by learning and unencumbered by hierarchy and fear; in other words, the ones with instinctive transparency. The more entrepreneurial ones. It’s worth taking a really close look at what open, transparent and entrepreneurially-minded businesses actually do to create that agility of culture and management. A big part of what drives open business is that they have a compelling and engaging purpose which is authentically and consistently held in the organisation. For purpose to have any impact, it must not only be credible and congruent to the activities of the business, but also absolutely authentic. And the key to that is the courage to be transparent. Most large organisations have spent a great deal of time, trouble and money creating and communicating a clear purpose. They know that a clear purpose can be the key to driving the agility

in their people, their leadership and their cultures that they need to survive in the fast-paced and ambiguous world they face. They believe that a clear purpose will engender the behaviours of alignment and engagement in their people, clarity and velocity in their management, and openness and creativity in their cultures that are the hallmarks of the agile, entrepreneurial business they seek to create. And, in theory, they are right. The evidence that authentically purposeful or ethical businesses outperform purely profit-led business is increasingly clear. Staff in purpose-led companies are 12% more productive (University of Warwick), 40% more engaged, 70% more satisfied and 300% more likely to stay (Energy Project). In a review of 56 academic research papers, 89% showed that companies with strong Environmental, Social and Governance factors outperformed competitors on a market basis (Deutche Bank).


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Entrepreneurially-minded organisations achieve agility not by having a purpose but by what they do with it. Most Boards are therefore serious about purpose – it isn’t a windowdressing exercise. And most are finding it’s making not a jot of difference to the behaviours in the organisation; “we’re just not getting any traction from our purpose” as one C-Suite said to me recently. There is a big gap between the purpose at Board level and the experience of employees and customers. Just why is this? Entrepreneurially-minded organisations achieve agility not by having a purpose but by what they do with it. The ones in the running shoes just use purpose in an entirely different way. These agile and entrepreneuriallyminded businesses possess a clearly defined set of drivers within their cultures that are the secret to bridging the Purpose Gap. Drivers that can be replicated in almost any organisation to bridge the gap and create unstoppable velocity for the company. Inspiring leadership helps. Purpose should be inspiringly and credibly led. But what the business believes about itself and how it behaves are more important. The first major difference in these organisations is a strong cultural assumption of TRUST. These cultures tend to be transparent, open, compassionate and creative rather than inward looking, fearful and controlling. In more traditional cultures based on control, people are instinctively distrustful of the purpose and hence it has no power to change things for the better. High trust organisations have been shown to be 50% more productive, with staff reporting 74% less stress, 76% more engagement and 56%

more job satisfaction (Paul J Zak). According to PwC, 58% of CEOs identified a lack of trust as an imminent threat to their business. Trust and transparency go hand in hand – and in their absence bad things happen. In the UK, 45% of employees still feel unwilling to speak out about the misconduct of colleagues because of a lack of trust in their employer and the fear it might jeopardise their job (Institute of Business Ethics). The second major driver of entrepreneurially-minded businesses is a companywide feeling of, and desire for, OWNERSHIP. Unless everyone in the organisation feels a powerful sense of emotional ownership of the business it will not flow through into agile employee behaviours. Organisations in which everyone feels an emotional investment demonstrate employee behaviours of alignment, engagement and autonomy. Researchers at Cornell University studied 320 businesses, half of which granted workers autonomy with the other half relying on top down direction. The businesses that offered autonomy grew at four times the rate of the controlorientated firms and experienced one third the turnover of staff. And the simplest and most compelling route to ownership is to create a feeling of ownership of the purpose the organisation serves. This is about a critical shift in how management at every level of the organisation thinks and behaves and about reframing the relationship between the company and the employees from one of control to one of openness and

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self-responsibility. The obsession in traditional organisations with opaqueness and control can have profound consequences; according to economist Francis Green “the lack of individual discretion at work is the main explanation for the declining productivity and job satisfaction in the UK”. The final driver of entrepreneuriallyminded businesses is the ability to manage in CONTEXT. Whilst trust drives cultural agility, and ownership drives engagement and autonomy, the ability to manage in context defines how effectively and efficiently management behaves.

Velocity is a measure of speed with direction. It’s not simply a matter of moving quickly but in the right direction

An increasingly volatile, uncertain, complex and ambiguous world requires a significant amount of adaptability; and that is something that entrepreneurial management is all too familiar with. Whether because of the speed of development, newness of the market or paucity of resources, entrepreneurial management has long been adept at navigating an ambiguous world. The key skill entrepreneurial management demonstrates is the ability to make decisions contextually to create clarity and direction rather than getting bogged down in the content. And this is a skill that can be taught. Where management uses a clearly articulated purpose as the context for key decisions, within an environment of transparency and trust, and where the whole team is willing to take responsibility, it

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creates enormous velocity as well as ensuring the purpose links the business up from top to bottom. It’s easy to agree that purpose is a good thing. With the life expectancy of a S&P 500 company down to 15 years, it’s easy to identify that the behaviours of aligned engaged staff, transparent, open, innovative cultures and agile clear-headed management are the key to survival. The problem is the crippling gap between purpose and behaviour.


muddle, distrust and cynicism will persevere and purpose will not take root. Without these entrepreneurial ways of thinking no business can hope to be agile. It will always be outrun. And in a volatile, uncertain, complex and ambiguous world the bear is very large and very real.

Without the entrepreneurial drivers of trust, ownership and context


John Rosling is CEO of Contexis bringing entrepreneurial thinking to some of the largest businesses on the planet, to improve agility, speed of decision-making and the ability to get things done. Contexis focuses on building agile, purposeful cultures, changing how people think and then turning thought into practical action that cascades change right down the organisation. www.contexis.com.


INVESTMENT PLATFORMS MARKET STUDY 30 November 2017 Morningstar, 1 Oliver’s Yard, 55–71 City Road, London EC1Y 1HQ This Transparency Symposium is wholly dedicated to the Financial Conduct Authority’s Investment Platforms Market Study. The event will be about hearing first-hand from the FCA about why this Market Study is being undertaken, its primary objectives and how it may improve competition in the market for the benefit of the consumer. We will also hear about what actions the FCA may take as a consequence of the Study. In addition, delegates will be able to listen to and engage with credible subject matter experts whose insights and experience will aid understanding and the development of wellconsidered views. Relevant market participants will also be given a platform (excuse the pun) to explain how they see this important regulatory development. This comment from Christopher Woolard, Executive Director of Strategy and Competition at the FCA about the Market Study provides useful background and context: “With the increasing use of platforms, and the issues raised by our previous work, we want to assess whether competition between platforms is working in the interest of consumers. Platforms have the potential to generate significant benefits for consumers and we want to ensure consumers are receiving these benefits in practice.”

Click here for further details; and use andy.agathangelou@transparencytaskforce.org for any queries


the lang cat view Each month the lang cat shares its cat’s eye view of all things transparency-related.

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This month, consulting director Mike Barrett ruminates on the value of fund discounts.

Platforms or asset managers. Where does the problem lie? The snappily titled “Investment Platforms Market Study Terms of Reference” paper, published by the FCA in July, is a great read. Or at least it is if you work for a platform consulting and research firm. Once a minority sport, platforms are increasingly mainstream. The lang cat puts advised platform AUA at £365.95bn (30/06/2017), with growth over the last 12 months coming in at an impressive 25.73%. Over on the direct side the market is dominated by Hargreaves Lansdown, who at last count, hold over £80bn of assets. According to the terms of reference, the combined services in scope for the study look after 78% of retail investment assets, so it’s only right that this work is taking place. The platforms market study will explore a number of topics, including barriers to entry, the impact of advisers (on platform selection) and customer preferences and behaviours. As interesting as these topics are (especially if you work for a platform consultancy), potentially the most significant work will be around the commercial relationships that platforms have with asset managers, and in particular the question of “whether platforms and similar firms are able and willing to

negotiate a competitive price on investment charges”. The Hargreaves Lansdown Wealth 150 range of researched funds, despite its name, consists of 92 funds. Most (but not all) of these offer a discount that has been agreed between Hargreaves Lansdown and the relevant fund manager. Post RDR these discounts, where they exist, must be passed in full to the end customer, so in theory this should be a good thing. Any discount is better than nothing, so what’s not to love? The reality is, however, a bit different. The average discount across the Wealth 150/92 range is 13bps. For someone investing the full £20k ISA allowance each year for 10 years this means a saving of £287. Hardly worth worrying about. Worse still, the presence of a discount creates the risk of misleading customers. Hargreaves Lansdown has a higher than average platform charge, so if you have £50k to invest there are 13 other competitor platforms where you can do so for a lower total cost of ownership by accessing non-discounted funds through a cheaper platform. In a world

where over half of investors don’t know that they are paying charges at all this is counterintuitive and difficult to work out. Add in the cost and complexity of administering it all, and we question whether discounts should be offered at all. Just to be very clear, the point here is not to have a pop at Hargreaves Lansdown. Almost everything it does it does very well. This is the one exception, which is a statement in itself. Even with market leading scale and flows, it is unable to get anything meaningful out of fund managers. The rules are contradictory. On one hand the FCA wants platforms “to negotiate a competitive charge”, yet platforms are not to influence flows. Is it realistic to expect an asset manager to give up margin with little in return? And in a world of vertical integration, where the platform is potentially more interested in selling its own funds, is it reasonable to expect it to make competitor funds more attractive. The level of discounts currently on offer seems to indicate that it’s not. Next year’s output from the platforms market study can’t come quickly enough.

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About our primer on the risk structure and contractual accrual rate of DB pensions CON KEATING | HEAD OF RESEARCH, BRIGHTON ROCK GROUP

The purpose of this article is to draw attention to a primer written by Dr. Anna Tilba (Director of Corporate Engagement at Newcastle University Business School), Dr. Iain Clacher (Associate Professor at University of Leeds) and myself. the management of scheme funds. Misconceptions abound: schemes do not have longer expected lives than their sponsor companies. Companies may change ownership more frequently than in previous times, but insolvency averages around 0.4% pa of the population, and that figure is inflated by the high rates of insolvency among young companies, which do not have DB pension schemes.

The primer explains at length the correct way in which to value defined benefit (DB) pension liabilities, and to draw attention to a range of misconceived practices which have developed in the management of DB schemes. It considers the role of trustees and purpose of the scheme and fund. Insolvency of the sponsor employer is the principal risk to occupational DB pension schemes. Though such events are rare, they now dominate

In essence, there are two views of the purpose of a scheme and fund. In the first, the scheme and fund exist to provide security for members’ accrued benefits and defray the employer’s cost of pension provision. One sponsorcentric justification for the use of funded arrangements is that this mitigates the risks associated with the scheme growing large relative to the sponsor’s labour force. In the second, the scheme is an entity capable of delivering the pensions of members before and after sponsor insolvency – effectively an independent insurance company. Prior to insolvency, recourse to the sponsor substitutes for paid-in equity capital.

Neither historical record nor legislation provide unambiguous direction. History tends to favour the former interpretation, and regulatory ‘guidance’ the latter. The picture is inconsistent and specific situations often anomalous. By way of illustration, the authorities resisted European plans to introduce Solvency II methods, which were derived for insurance companies, for UK schemes, but now the regulator requires schemes to consider their sponsor covenant and adopt “integrated risk management”. A public debate is clearly necessary. The authorities have developed and promoted a particular narrative; this is the framework within which the six multi-part questions posed in the DWP’s DB green paper are situated. In order to respond in a coherent and consistent manner, we first deconstructed that narrative. This deconstruction shows that many of the issues are products of the legislation and narrative. The narrative is also incomplete. For example, it is much concerned by the growth in dividend payments, which has been accompanied by calls for deficit repair contributions to take priority, but there is no discussion about contributions being part of a firm’s labour costs, and such contribution payments would carry implications for


productivity, competitiveness and the Exchequer’s corporation tax receipts. Consolidation is another prime example. It arises from the ‘hair cuts’ applied (unjustifiably) by the Pension Protection Fund (PPF) to the pensions of members – who are third-party victims of sponsor insolvency. This motivates the recommendation for the PPF to pay full benefits. Indeed, such full pension indemnity insurance is a far superior resolution than funding to the problem of continuity after sponsor failure. It is materially cheaper and does not introduce the spectre of vast amounts of orphan (tax privileged) assets. This motivates the call for the PPF to be privatised and opened to competition. Other examples are errors of analysis – pre-pack insolvency is not a problem of moral hazard, but of perverse incentives arising from legislation, notably the Section 75 (PA 1995) value. It is a self-serving mischaracterisation that permits blame-shifting and demonisation of a company’s management. Mixed messages are also evident here: the debt remains a general unsecured obligation but its amount is grossly inflated. Yet more examples arise from interpretations and emphasis, such as the conflicted objectives of the regulator. The objective “to reduce the risk of situations arising which may lead to compensation being payable from the Pension Protection Fund” is routinely described as being ‘to protect the PPF’. The long-running debate on scheme valuation is relevant here. The existing methods are appropriate for the pricing of new business, and a failed scheme is new business for the PPF, but the valuation of a scheme is a question of a book of business

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in force, and for that, different methods are appropriate. The methods specified in legislation are counterfactuals to the business in force valuation. They address the question: what might this set of liabilities cost under this discount rate assumption? These are replacement costs rather than going-concern valuations. It is interesting but it isn’t a true and fair view of the status quo, and that is a requirement of both UK and European law. These values are qualitatively different from the claims of other creditors. Professor Sir Roy Goode made the point that a surplus may only be determined after all liabilities have been fully discharged – the unstated corollary is that these are estimates also of limited likelihood. Ordinarily, problems in measurement over time resolve themselves with the passage of time, but that is not the case here. There are direct and explicit costs resulting from this mismeasurement – deficit repair contributions and the costs of cash equivalent transfers are examples. There are also indirect costs, among which the distorted asset

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allocations and portfolio hedging strategies figure large. Costs are further inflated by the compliance requirements of current practice. The greatest cost is unmeasured; it is the cost of inferior provision to current and future generations. There is much in the Green Paper with which we agree, but with problems and scheme closures on all fronts, it really is time to question the narrative. Funded occupational DB schemes are by far the most efficient form of pension provision ever devised. Their collective risk pooling, risk sharing and risk mitigation lower the cost of pension provision materially. These matters are and should be of central concern in social welfare policy, and that motivates our call for a Royal Commission to investigate, consider and hopefully resolve these issues. The full response to DWP’s Green Paper is freely available at: http://www.longfinance.net/ publications.html


Con has been a member of the steering committee of the financial econometrics research centre at the University of Warwick. He has held senior positions at several international institutions including the European Federation of Financial Analysts Societies, Societe Universitaire Europeene de Recherche en Finance and the OECD’s private pensions committee. Con has published widely on the regulation of financial institutions and pension systems and has developed new statistical tools for financial data analysis. Con is involved with many of the Transparency Task Force’s Teams and is a winner of the Transparency Trophy. He is also an Ambassador of the Transparency Task Force.

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Transparency Statements

the link work fine just need to set it in

Transparency statements are a great way for individuals and organisations to show support for our international campaign for improved transparency in financial services. We believe that higher levels of transparency are a pre-requisite for fairer, safer, more stable and more efficient markets that deliver better value for money and better outcomes for consumers. Transparency breeds trust. By fostering greater transparency across financial services, together we can positively impact the reputation of the market as a whole. Which is good for everyone. You can add your transparency statement by completing this sentence: ‘I believe there ought to be higher levels of transparency in financial services because…’ and sending it to andy.agathangelou@transparencytaskforce.org

Here are some examples from thought leaders showing their support. Paul Amery

Polly Turner-Ward

Editor, Paul Amery Ltd

Department for Work and Pensions

“I believe there ought to be higher levels of transparency in financial services because it will reduce the information asymmetry between product providers and consumers.”

“I believe there ought to be higher levels of transparency in financial services because it will improve client service.”

Nigel Boothroyd

Anthony Walters

Non-Executive Director and Chair of Risk Committee, Redwood Bank Limited

Head of Public Affairs, ACCA Global

“I believe there ought to be higher levels of transparency in financial services because anything that promotes honesty, integrity and trustworthiness (in any walk of life) is to be applauded.”

Gavin Palmer Project Coordinator, Share Nomination to the AGM Committees/ShareSoc

“I believe there ought to be higher levels of transparency in financial services because honesty and direct transparency allow the correct problems to be solved instead of diverted down dead end alleys or off an unseen cliff edge.”

“I believe there ought to be higher levels of transparency in financial services because sound ethical practise needs to be at the heart of financial services.”

Anne-Marie Williams Senior Analyst and Engagement Officer, ShareAction

“I believe there ought to be higher levels of transparency in financial services because it will promote fairness in the investment system which will benefit savers, companies and the environment.”


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August 2007: things changed for Northern Rock, a respected bank, after BNP Paribas, one of the world’s largest banks, froze withdrawals on funds hit by the US subprime crisis, and the European Central Bank placed a record €94.8bn into Europe’s money markets – which was the commencement of the real loss of confidence in those markets – the harbinger of the coming financial crisis. In Northern Rock 80% of operating monies came from wholesale funding or ‘securitisation’ of assets. Profitable, Northern Rock had expanded quickly; it had good depositor products and cost control, was efficient and gave 5% of all profits to the ‘Northern Rock Foundation’ a worthwhile charity helping good causes.

bond covering and securitisation borrowing it had always had. It had, according to evidence presented

The Rock Board’s decision to declare that they had arranged this funding contingency was preempted in an announcement by the BBC; all hell broke loose the next day. Panic started.

There was no problem with the company’s lending model, and the £115bn mortgage book was of top quality.

Media reporting latched on to the queues which formed.

Where a reasonable finger of criticism could be pointed was at the company’s funding model; although it had worked for years, the main sources of the funding on which it relied were now drying up and were incredibly going to cease altogether – not because of any lack of confidence in the Rock but because of a global panic in banking. The Rock was in discussion with the Bank of England, and the Financial Services Authority (who were more or less permanently on the premises). These regulatory authorities were aware of the situation. In September it became clear that that funding might possibly cease – such was the market panic. But, the bank was never insolvent – it could just not get at the assets quickly enough and needed the

solvent banks to borrow, at penal rates, to avoid the banking system being at risk. The assistance is not available to insolvent or non-going concern businesses. The backstop contingency was approved.

Rationally, the public wanted their money out, just in case. All a very sad sight. One thing is abundantly clear; if you have a liquidity problem and need a contingency to help get by, the last thing you need is a panic withdrawal of about £8bn of cash in just one week, and even more later. How does that help the bank, or the country? to the Treasury Select Committee (TSC), some 2/3 months of funding available. So, lender of last resort (LOLR) discussions with the Bank of England commenced. The TSC was told that the Rock requested a ‘backstop contingency’ of £4bn, not a loan and that they did not intend to ‘draw down’ on the facility; it was there as a prudent backstop. LOLR is there precisely to help

An approximately £4bn contingency request became a huge taxpayer loan, at crippling rates. A tragic event for the bank, the North East and the people. It might have been a ‘scoop’ for the BBC, but at what cost? I didn’t notice a BBC ‘scoop’ when the £61bn bail out was made in secret to other banks and the public weren’t told?

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Nobody in the media cared, it seemed. Not sensational enough? But, for the shareholders it was to get worse.

Then the media got going... everywhere, every day, seemingly forever.... Northern ‘Crock’..., Northern ‘Wreck’.... ‘queue’ pictures again, the same ones it seemed over and over.... ‘CEO Adam Applegarth cashed in his share options’.... ‘Personal’ matters headlined.... The bank that was ‘bust’...’taxpayer’ bailout...bad use of ‘taxpayer’ cash... etc. Repeated, and still going. There was/still is a mass of hysteria about one of the company’s products, the ‘Together’ ‘125%’ mortgage; this was overblown and failed completely to mention that there was a limit of £30k on the unsecured element of the deal. Neither did the media pay much regard, if any, to the company’s rightful claim that not only did most other banks offer loans of 95% LTV – and meanwhile their customers may have had other borrowing already – but the Northern Rock package was to help or assist professional buyers to purchase a home and took into account the ‘extra’ costs of the purchase such as legal fees etc and existing borrowing – and it was all against a risk control of the ability to pay.

At this point there was no ‘Banking Act’, no ‘Special Resolution Scheme (SRS)’; which every country in Europe had had, for ages. We were ‘light touch’… ‘just get lending’. The Government starting working on the features just after the Rock Run. The resulting SRS and Banking Act 2009 came into force (there is some evidence to suggest the principles were being ‘used’ in dealing with other banks before the Act was passed)! If that Act had been on the statute, HM Government would have had the procedure to deal with the issues of the Rock, and shareholders would have had protection via a right to a proper independent valuation of the considerable assets.

Default rates on this product were very low, and indeed the impairment rates on all the company’s lending were generally less than half the national average.

On 21 February 2008 Northern Rock was nationalised after a passage of all the stages through Parliament taking just 48 hours! MPs (such as Bill Cash) and others objected to this procedure as a ‘correct’ way of doing parliamentary business. Also included was a shareholder compensation ‘order’ appointing an ‘independent valuer’ – but who had to take into account set assumptions which we felt were unfair, and inaccurate; and the need for them unreal, as no other UK bank had them, or was asked to return State Aid instantly – most of them enjoyed it for 5 to 7 years. Only one result could happen for the Rock. It did. A Nil valuation.

Did anyone in the media ever bother to mention that the bank was in fact solvent, even though it was solvent, and had £115bn assets; even though Applegarth said it, Darling said it, and the Tripartite knew it?

Bank of England minutes later showed that this procedure would “take care of the shareholders”. Given that there was only an Insolvency Act to follow, and Northern Rock was acknowledged as being solvent, was not the

real intention or effect here to create a new ‘state’, one of ‘effective’ insolvency – in order to seize the company and deprive the shareholders of their property which was advised to HM Government as being worth £2.84bn, even after the run? It worked, we got nothing, and the Treasury now stands to gain something between £4.5bn and £8.3bn PROFIT. In 2015 Chancellor Osborne said at the Mansion House speech that there was an anticipated £8.5bn profit from the Rock, as against over £40bn loss to the taxpayers via bail-outs of the other banks! So much for Northern Crock then! That huge profit is AFTER payback of all taxpayer loans (at a penal rate of interest and payment of fees, and after portions of our assets were sold off. Former Bank of England Governor Mervyn King recently stated on TV that he wanted the Rock shareholders to have a right to a share of any residue profits accruing to HM Government, but that it was rejected by the Treasury. Which bank could survive a run? Not many. But, Northern Rock did and paid all the penal interest loans and penalties and now the Treasury is going to be ‘unduly enriched’ by this huge windfall, which must be related to the embedded value of the company. Jobs lost, brand finished. Northern Rock Foundation closed – a very major blow in the North East. 150,000 pensioner shareholders robbed of the little nest eggs they were leaving for their grandchildren. Shocking stuff. The Banking Act (now in force) states that “the authorities do not intend to profit from a resolution of a failing firm”.... Oh, really?


Contrast that laudable aim for dealing with such bank issues in the future with what the Labour Chancellor said in 2008. “Under public ownership the government will secure the entire proceeds from the future sale of the business in return for bearing the risks in this period of market uncertainty”.

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The latest excuse is to keep these profits to cover losses made by helping other banks. That’s alright then. The public at large do not trust the media, but they are duped by it nevertheless, and tend to mock and laugh at the expense of the unfortunate.

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Do you think they trust assetstripping governments? Has the media helped? We live in a murky world.


Dennis Grainger, now aged 71, lives in Burnopfield, Co. Durham. He is a retired Manager who worked in Finance (Management Accounting) at Northern Rock Bank for nearly a decade until July 2007. Very disappointed with the government’s seizure of Northern Rock from shareholders with no compensation, Dennis formed a local action group, which resulted in many petitions being served on Parliament, as well as a group of 30 shareholders meeting with MPs at the House of Commons. In 2008 he joined the national campaign for compensation run by the Shareholders Action group within the UK Shareholders Association. In that voluntary work he acted as Lead Plaintiff in the legal Judicial Review, Court of Appeal and European Court of Human Rights considerations on behalf of the small shareholders of Northern Rock. For the last three years he has headed that Action Group.







Our regular meetings where we discuss and debate all things transparency in financial services.

A collaborative campaigning community dedicated to driving transparency in financial services, right around the world.







Our official publication, sharing news, views, insight and ideas from our global community.

How we recognise particular contributions to the transparency cause. Awarded at each Transparency Symposium and always open for nominations.

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f o y r o t c e r i D The ncy e r a p s n a r T o r P O r g a n i s at i o n s

A business shouldn’t stand out because it’s ‘pro-transparency’, it should be the norm. If you lead a pro-transparency organisation, join those already advertising in our directory. The more firms are seen here, the more weight gathers behind our argument that transparency is a commercial virtue and not a threat.

We’re happy to consider classifications beyond those shown here. Please contact andy.agathangelou@transparencytaskforce.org for more information.

ACADEMIC INSTITUTIONS Prof. Dr. Heinz-Dietrich Steinmeyer University of Muenster, Germany School of Law, Universitätsstrasse 14-16D-48143 e: steinmeyer@uni-muenster.de Muenster phone: 49-251-8329744 m: 49-171-8384816 I am a professor for Social Security Law, Labour Law and Civil Law at the University of Muenster Law School. My special field is pensions – occupational/ supplementary pensions as well as public pensions. I am doing consulting work nationally and internationally including international organizations (EU etc.). I am the Chairman of the European Network for Research on Supplementary Pensions.

AUTO ENROLMENT Steve Conley, Managing Director, Workplace Pensions Direct e: Steve.conley@wpd.email w: www.workplacepensionsdirect.co.uk t: 0113 457 4563 m: 07850 102070 Since 2015, Workplace Pensions Direct has made auto-enrolment simpler for small businesses, enabling employers to focus on running their companies without having to worry about pension law, and the cost of poor pension decisions. Workplace Pensions Direct offers an affordable, end-to-end, auto-enrolment solution that guarantees compliance with the law. With professional expertise, a century of payroll and pensions experience, and professional indemnity insurance – Workplace Pensions Direct has removed the worry and risk of autoenrolment for thousands of small businesses and their advisers.


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Gavin Perera-Betts, Chief customer officer, NEST e: Gavin.Perera-Betts@nestcorporation.org.uk w: www.nestpensions.org.uk t: 020 3056 3719 NEST has been set up by the government especially for auto enrolment. We’re here to make sure that every employer has access to a workplace pension scheme that meets the requirements of the new pension rules. But we do more than just meet the regulatory minimum. NEST comes packed with the sort of high-quality features you need, whether you’re saving with us, using us for your workers or helping your employer clients.

COMMUNICATIONS CONSULTANTS Lesley Alexander, Managing Director, Ferrier Pearce e: hello@ferrierpearce.com w: www.ferrierpearce.com t: 020 3772 5360 Transparency – clarity, straightforwardness, honesty. As communications consultants, we support transparency in financial products, especially long-term savings. This applies not just to charges, but to the way we describe the products and their benefits to consumers. We believe the language we use should be clear, unambiguous and direct, helping people to make the most out of their money.

DATA SERVICES Larry McLaughlin, CEO | GSAV Ltd e: larry.mclaughlin@gsav.io w: www.gsav.io t: +44 203 655 2182 m: +44 7771 978 118 US m: x+1 646 946 5272 GSAV Ltd is Reg Tech/Fin Tech company exclusively serving the Buy-Side and delivering pricing solutions in the Collateral Lending Market to benefit Beneficial Owners and enable Managers to meet their Fiduciary and Regulatory obligations. GSAVr is a specialist pricing, tracking and regulatory tool and provides an independent price for collateral lending transactions that defines rate and use in a manner that the Regulators feels meets the test of both price and use. GSAVr is the only solution available today that addresses the current challenges of any form of collateralized lending, full price discovery and full price transparency.

David Rich MIod, CEO | Accurate Data Services e: david.rich@accuratedata.co.uk w: www.accuratedata.co.uk t: 01603 813366 m: 07919918623 David is Chief Executive of Accurate Data Services, a specialistdata quality and positive people tracing business that is focused on unclaimed assets in the financial service sectors. ADS traces lost members, clients and policy holders for a variety of organisations including Life and Pensions funds, Banks and Asset Managers. The goal is to help businesses reunite their customers / members with their assets and deliver positive consumer outcomes. David is an active campaigner for transparency and action around the large unclaimed assets issues present in the UK.

FIDUCIARY MANAGERS Ralph Frank, CEO DC (UK), Cardano e: info@cardano.com w: www.cardano.com t: +44 (0)20 3170 5910 Cardano was founded in 2000 and now has over 150 staff with backgrounds in the areas of risk management, investment management, research, actuarial and investment advisory. Cardano studies the causes and impact of risk and costs in order to significantly improve financial performance and resilience. We currently provide Investment Advisory or Fiduciary Management services to over 1.3m pension fund beneficiaries with assets totalling over £120bn.

FINANCIAL PLANNING Mike Stafford CFP, Director, Stafford Wealth Management e: mas@staffordwealth.co.uk w: www.staffordwealth.co.uk t: 01992 501601 Stafford Wealth Management was formed in 1986 to provide bespoke lifestyle financial planning and investment services to private clients. It is one of a small number of elite firms in the UK that is accredited by the Chartered Institute for Securities and Investment. Stafford Wealth Management is authorised and regulated by the Financial Conduct Authority for investment business.

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INVESTMENT CONSULTANTS Marcus Whitehead, Head of Investment Consulting, Partner, Barnett Waddingham e: marcus.whitehead@barnett-waddingham.co.uk w: www.barnett-waddingham.co.uk t: 0333 11 11 222 Barnett Waddingham has grown to become the UK’s largest independent provider of actuarial, administration and consultancy services. Our total headcount is now over 850 – with offices in seven locations around the UK. The investment consulting practice provides bespoke, independent investment advice to over 360 pension schemes with assets from the millions to billions. We continue to provide the personal, quality, tailored approach that has made us successful and has led to high levels of client retention.

INVESTMENT GOVERNANCE CONSULTANTS James N Meenan, Principal | JNM Investment Governance e: james@jnmresearch.com w: www.jnmresearch.com t: +353 (0)1 687 1027 m: +353 (0)86 257 2646 JNM Investment Governance gives trustees independent coaching and support to develop strategies and techniques to stem the overwhelming resource handicap they face in discussions with investment professionals. JNM’s objective is to facilitate a constructive two way dialogue with attendant benefits for all parties.

Henrik Pedersen, Managing Partner & Co-Founder, Clerus LLP e: henrik.pedersen@clerus.co.uk w: www.clerus.co.uk t: +44 20 3356 2845 m: +44 7767 656234 We partner with pension schemes and other asset owners to review and improve investment decisions, governance and value-for-money, through independent and informed investment analysis. As a result, investment outcomes can be improved without the need to change service providers or taking on more investment risk. We offer a free initial assessment, so why not try us out?

INVESTMENT MANAGEMENT Robin O’Grady, Head of Business Development, Hawksmoor Investment Management e: Robin.ogrady@hawksmoorim.co.uk w: www.hawksmoorim.co.uk t: 01392 410180 m: 07468 697900 Hawksmoor specialises in providing high quality discretionary investment management services for private clients including trusts, pension schemes and charities. We are a privately owned business with no ties to a bank or any other financial institution. Our experienced and well qualified team of investment professionals is focused solely on providing clients with the best service and consistently good performance.

NOT FOR PROFIT Dr. Kara Tan Bhala, President & founder, Seven Pillars Institute for Global Finance and Ethics e: kara@sevenpillarsinstitute.org w: www.sevenpillarsinstitute.org t: +1(785)865-8824 (mobile) Seven Pillars Institute (SPI) for Global Finance and Ethics is an independent, nonprofit 501(c)(3), nonpartisan, organization whose mission is to highlight and analyze issues of moral philosophy in global financial markets with a view to enhancing ethical practice and policy.

PENSION ADMINISTRATION Margaret Snowdon OBE, Chairman, Pensions Administration Standards Association e: info@pasa-uk.com w: www.pasa-uk.com m: 07983 565955 The Pensions Administration Standards Association (PASA) is a not-for-profit organisation which acts as a focal point to engage with industry and government on pensions administration matters. It was created to provide an independent infrastructure to set, develop, and provide guidance on pensions administration standards. It is an independent accreditation body, assessing the achievement of good pension administration standards by schemes and providers.


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RESEARCH Jackie Beard, Director of Manager Research Services EMEA e: Jackie.Beard@morningstar.com w: www.global.morningstar.com/UK Morningstar is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data and research insights on a wide range of investment offerings including managed investment products, publicly listed companies, private capital markets, and real-time global market data. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than USD $200 billion in assets under advisement and management as of 31 December 2016. The company has operations in 27 countries.


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Arno Kitts, Founder & Chief Investment Officer, Perspective Investments C0 M0 Y0 K0

e: Arno.Kitts@PerspectiveInvestments.com w: www.PerspectiveInvestments.com t: +44 20 3290 6486 Perspective Investments is a multi-asset multi-strategy investment COLOURS CMYK C100 M88 Y0 K0 manager. We invest on behalf of our clients, including our founder C0 M0 Y0 K0 family. Our commitment to our clients is to help them achieve their financial objectives. We do this by aiming to deliver higher returns with lower volatility and better capital CMYKour investment performance track record preservation than conventional equity portfolios. Of course, COLOURS while C100 M96 Y8 K5 is consistent with this aim, past investment performance is not necessarily predictive of future results. C0 M0 Y0 K0


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24 January 2018

Huge thanks to Allan Gray for hosting this Transparency Symposium. We’re looking for speakers, panellists, delegates, media partners and sponsors. If you’re interested or would like more information, please contact andy.agathangelou@transparencytaskforce.org. If you don’t yet know about the services provided by Allan Gray you can check out their website here

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The Foreign Exchange Team’s response to Request for Feedback on last look practices as requested by the Global FX Committee XAVIER PORTERFIELD CFA | HEAD OF RESEARCH, NEW CHANGE FX and GUY HOPKINS | CEO, FAIRXCHANGE The Request for Feedback reads: Principle 17 of the Code states that “During the last look window, trading activity that utilises the information from the Client’s trade request, including any related hedging activity, is likely inconsistent with good market practice because it may signal to other Market Participants the Client’s trading intent, skewing market prices against the Client, which (1) is not likely to benefit the Client, and (2) in the event that the Market Participant rejects the Client’s request to trade, constitutes use of Confidential Information in a manner not specified by the Client”. Question 1. As noted above, the Code states that “During the last look window, trading activity that utilises the information from the Client’s trade request, including any related hedging activity, is likely inconsistent with good market practice because it may signal to other Market Participants the Client’s trading intent, skewing market prices against the Client, which (1) is not likely to benefit the Client…” Do you agree or disagree? Are there specific situations where this trading activity benefits the Client? In those situations, is such trading activity related to the validity or price checks that the Code states as the purpose for last look? Please provide reasons for each response. Transparency Task Force response: A shorter paraphrase of the question above might be, is prehedging activity while a trade is being held in a hold window fair

and consistent with the standards of the code? No. The Transparency Task Force advocates for transparency on how customer orders are handled. We agree with the assumption that trading activity during the hold window is effectively using customer information, and in the event the deal is rejected, is a misuse of that client information. The information leakage from trading in the hold window on trades that are subsequently rejected is (highly) likely to disadvantage the customer. In the question, the Request for Feedback seeks further clarification: “Are there specific situations where this trading activity benefits the Client? In those situations, is such trading activity related to the validity or price checks that the Code states as the purpose for last look?” If a Liquidity Provider (LP) is able to pre-hedge in the last look window and ultimately then honours the original quoted price on the customer’s held order, there may be situations where this increases their willingness to accept trades from that client. All else being equal this would increase the client’s fill ratio, reducing the number of retries. This could conceivably benefit the client. However, it presumes that the LP is not attempting to internalise any of the risk, indeed it is an explicit externalisation of the client’s flow. This would be expected to increase market impact, which would adversely affect the client if they had more risk to execute in following orders. It would be necessary to weigh up the benefit of increased fill

ratio against the potentially higher market impact; something which would vary from case to case and would be hard to tell a priori. That being said, pre-hedging in the last look window and then rejecting the client’s trade is not likely to benefit the client. There is likely to have been some market impact and the client necessarily has to try to trade again, at a rate that is likely to be disadvantageous. Question 2. Based on your response to Question 1, do you consider that the language set out in the Code on this activity should be modified (for example, should it be strengthened further or provide further detail as to what may or may not constitute good practice)? Please provide reasons. Transparency Task Force response: We would argue that the language of the code should be strengthened. The existence of last look increases the level of information asymmetry in the market. The practise of last look was originally intended as a means for LPs (banks) to protect themselves against trading with better informed (read: faster) traders. Applying last look asymmetrically can be used as a screen to allow market makers to selectively accept trades that are favourable to their trading book. On the other hand, the potential advantages of symmetrical last look, rejecting trades that are unfavourable to the client, are likely to be diminished by the LP’s hedging activity during the hold window. In


order to buy, a client needs to find a market maker willing to sell. In order to hedge a sell order, the market maker must buy. Pre-hedging means buying ahead of the client, to meet their buy order. Symmetric last look, absent pre-hedging activity in the hold window is likely to offer potential advantage to the client. The LP will have rejected an order than was beyond some tolerance limit and unfavourable to the client at the end of the hold window. This gives the client an opportunity to trade at a rate that has moved in their favour. However, it is important to separate symmetric last look from the prehedging activity. Allowing a client the opportunity to place their order at a more favourable rate is clearly beneficial to that client. However, this benefit may be diminished by pre-hedging activity during the hold window. Because LP and client together take two opposite sides to a trade, the LP’s pre-hedging must always be in the same direction of the client, diminishing positive price slippage, and increasing negative price slippage.

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Additional Transparency Task Force comments:

of the funds whose assets they hold in trust.

The Global Code seeks to improve behaviours in the market, to provide market participants with a template of best practice. We vigorously support this endeavour. However, there are areas of activity which the code has not addressed, which in our view, still represent a clear obstacle to fair, free and transparent market practice.

2. Standards surrounding time stamping

We would like to highlight two areas that warrant your continued attention. 1. Standards on mixed principle and agent roles The UK government’s The Fair and Effective Markets Review (Fair and Effective Markets Review. June 2015 final report, chapter 4, page 55, paragraph 33) called for the Global Code to “set standards for the treatment of clients and counter-parties. This section of the code should address issues such as the prevention and management of conflicts of interest, especially concerning mixed principal and agent roles”. This ambiguity is particularly evident in custodial FX trading, where custodians are able to trade as principle against the interest


Xavier began his career at Idea Global, a research house based in London, in 1997. He then joined FX Concepts to work in research in 1998 and stayed there until moving back to Paris in 2009. Since then Xavier has been involved in research and development in the currency field and has been instrumental in the development of the New Change FX benchmarks.

One of the aims of MiFID II, and PRIIPS (for retail investors), is to improve cost transparency, to promote the comparability of funds. As John Bogle noted, the magic of compounding returns is overpowered by the tyranny of compounding costs. But without accurate time stamps transaction costs can be shrouded. Cost shrouding is a deliberate attempt to obfuscate the true cost of execution by booking trades at arbitrary times of the day, usually with a view to maximise dealer profits at client expense. See Russell Research (It’s time for more choice in FX, 2004, 2010) Record Currency Management (2011) Olser, Savaser, Nguyen (2012). Time stamping of trades, when correctly applied, can act as an important safeguard against cost shrouding. More importantly, a failure to record accurate time stamps should be inconsistent with best practice. There should be time stamps on everything.


Guy began his career in 1998 providing technology solutions to Lloyds Insurance Market. He joined Bloomberg in 2002, where he held a number of sales and management roles, culminating in responsibility for Bloomberg’s popular FX<GO> product in Europe. In 2008 he joined Morgan Stanley, where he managed eDistribution for FX and Emerging Markets in EMEA. He has extensive practical experience in managing an electronic foreign exchange business, specialising in TCA and algorithmic execution. In 2016 he launched FairXchange. He also acted as a consultant to MahiFX, helping them to develop and market algorithmic execution tools for investors.


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Transparency Times November 2017  

The Transparency Times is the official publication of the Transparency Task Force; the collaborative, campaigning community dedicated to dri...

Transparency Times November 2017  

The Transparency Times is the official publication of the Transparency Task Force; the collaborative, campaigning community dedicated to dri...