Fidelity Worldwide Investment could be set to call an end to its use of a controversial stock lending practice, in the wake of rules that came into force in February from the European asset management regulator that demand all net earnings from such transactions be reinvested in funds.
FTAdviser reported in August last year on new rules from the European Securities and Markets Authority, which would mean all profits made from lending stock owned by an asset manager to a third party for the purposes of short-selling be reinvested, net of costs.
Dominic Rossi, chief investment officer for Fidelity, told the Business, Innovation and Skill’s Committee during evidence gathering as part of the Kay review into UK equity markets that his firm was likely to review the practice and would likely stop stock lending.
He said: “On the stock lending, first of all, it should be very, very clear that the income derived from stock lending belongs to the client. That should be absolutely clear. The only subtraction from that would be administrative fees related to the stock lending programme, but the income belongs to the client.
“With respect to the practice of stock lending, again, my board is extraordinarily conservative about this. The idea that we would lend the stock that we obviously like, otherwise we would not own it, to someone who is then going to short it does not really make much sense. It is not in the interests of our clients to have to foster that short-selling, nor is it in the interests of the company in which we invest.
“We do a very limited amount related to dividends and I suspect even that practice will stop shortly.”
Tom Stevenson, investment director at Fidelity, confirmed to FTAdviser sister title the Financial Times that the practice was indeed being reviewed, adding that tax haromonisation rules such as those introduced in France had “diminished the attractiveness” of such lending.
Following Esma’s announcement of the new rules last year, asset management trade body the International Securities Lending Association said it was unclear if fees could be counted as ‘costs’ under the guidelines, potentially leaving the door open to asset managers to continue to make money from the practice.
However, controversy over the practice has led to two lawsuits being launched in the US against Blackrock and State Street, which according to the FT allege revenues of 35 and 50 per cent respectively were being withheld.
A poll conducted last year by research company Morningstar found that between 45 and 70 per cent of revenues from stock lending was being returned by exchange-traded fund providers to European investors, with asset managers retaining €40m (£32m) a year in net revenue.