EasyEquities, the investment platform owned by JSE-listed Purple Group, was forced to cancel the launch of scrip lending on Thursday, the same day it announced the offering to clients. Much of the pushback was on Twitter, after certain users had highlighted potential problems with how EasyEquities had changed its terms and conditions, and how it communicated this to clients.
The introduction of scrip or securities lending, where an investor’s stock is lent out to a third party, was buried in an email to clients which referred to “minor changes to … terms and conditions” including “clarifying Sharia law compliance, [and] adding securities lending to our platform”. Neither of these changes were explained further in the email, nor in the summary document.
Much of the ‘Twitterstorm’ centred on the decision by EasyEquities to opt in all clients to scrip lending by default. Investors who did not want their securities to be lent out had to opt out in writing. There were further concerns around how clients who had opted out of marketing communication would receive notice of this change at all.
Charles Savage, CEO of the group and of the EasyEquities business, admits that the response was “overwhelming”, that the launch “didn’t go as planned” and that Thursday was a “tough day”.
For a platform that sells itself on accessibility, transparency and on democratising investing, it is not clear how EasyEquities botched this launch as badly as it did.
In a near hour-long mea culpa webinar on Friday, Savage explained that EasyEquities “saw securities lending as a way for people to automatically reduce their costs without commensurately increasing their risk”.
He highlights that not only is securities lending complex, but that this has “never been done before for mass retail”. On Thursday, in its responses, the platform made a lot about the fact that securities lending “is the reserve of the very wealthy”. Institutional investors and pension funds make use of it.
“We broke our own rules,” he admits. “We didn’t make it easy to understand.”
The entire philosophy of EasyEquities is to make “sure the product remains true to being easy”, and “we got that wrong”.
The new clause in its terms and conditions which covers securities lending (Clause 36) runs in excess of 2 800 words.
He adds that in the communication and implementation of the change, customers didn’t feel they had been given a choice. “We thought it was the default choice to opt everyone in.”
EasyEquities remains committed to launching scrip lending once it has “alleviated” customer concerns and made the “entire experience easier”. By default, clients will be opted out. Therefore, to ensure that customers opt-in to securities lending, EasyEquities will have to do a very good job of explaining this to its near half a million customers.
“Once we’ve presented it properly, if our customers don’t want it, we won’t launch it,” says Savage.
Only after it cancelled the rollout of scrip lending on Thursday did it disclose to its clients how much revenue would be earned from this borrowing of stock, and how it would be split.
In the follow-up email to clients on Thursday, it said: “All the revenue flowing from the securities lending would have been split 20% to the institutional partner [revealed to be Zarclear on the webinar], who essentially lends out the securities and manages the risk and return, 48% to EE [EasyEquities] clients for their stock and 32% to EasyEquities for managing the tech and platform on which the securities lending runs.”
“A well-diversified portfolio of listed securities would earn around 0.7% a year from securities lending income. With this in mind and the fact that we are limiting the lending to 60% of your portfolio, the total revenue from securities lending would be on average 0.42% (0.7% x 60%). Of that, clients would therefore earn an extra 0.2% (0.42% x 48%) on their portfolio per year.
“Out of interest, that’s roughly 30% of what our clients are spending on transaction fees a year. So, in essence, your costs would be reduced by 30%.
“Reducing costs is the only certain return you’ll ever get from investing and that’s why this was such a big deal for us, a way to reduce your costs by increasing your income and effectively guaranteeing a greater future return.”
Rather astonishingly, the updated terms which includes Clause 36 on automatic securities lending remains the active terms and conditions document on the Easy Equities site.
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