Stock lending puts retail funds at risk

UK retail investors may be unaware that fund managers can lend out their investments as part of a stock lending programme

UK retail fund managers are lending up to 100% of clients’ funds, says a new report by SCM Private, a London-based fund manager. The practice is legal, but the investors are often unaware of the practice and the counterparty risk it carries.

The Financial Services Authority recently commented on counterparty risk within synthetic exchange traded funds, making them ‘not appropriate for retail investors’ as they may not ‘adequately understand the risks’. Similarly, retail investors are unlikely to understand the counterparty risk involved in allowing fund managers to lend out their assets.

SCM said 19 out of 20 UK retail fund managers it had analysed can lend up to 100% of clients’ funds. SCM said the 19 fund managers represented £241bn in UK retail assets. At least half of these fund managers were found to have participated in stock lending.

In addition, SCM said, “on average just 66% (where shown) of the gross income derived from stock lending was retained by the fund after fees, although investors potentially bear 100% of the risk.

“Just 35% of managers analysed specified the split of fees between the fund and the fund manager/stock lending agent within their full prospectuses,” SCM said.

Clear and full disclosure regarding stock lending should be mandatory to protect investors, says Gina Miller, co-founder of SCM Private. “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.”

“In our opinion, the minimum levels of disclosure and protection for retail investors contained within UK legislation are totally inadequate,” says Miller.

SCM believes that the UK regulator 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.”

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