FSA defines limits for 'collective engagement'

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Britain’s financial regulator is backing political calls for more investor activism, but warned shareholders against teaming up to trade or working jointly to avoid disclosing stakes in companies.

One month after a government-sponsored review into corporate governance urged large shareholders of banks to take boards more to task over strategy, the Financial Services Authority (FSA) said it wanted to clarify the limits of "collective engagement".

The FSA said on Wednesday it was happy for institutional shareholders to raise "legitimate concerns" on particular corporate issues with the management boards.

"The market abuse rules do not prevent investors from engaging collectively with the management of an investee company," it said after publishing a letter to the Institutional Shareholders Committee (ISC), an umbrella association of UK asset managers.

"However, trading on the basis of knowing another investor's intentions or working jointly to avoid disclosure of shareholdings could constitute market abuse."

Institutional investors, the largest owners of London-listed companies, have been blamed for failing to demand greater accountability from companies - especially banks - in the boom years that preceded the worst financial crisis since the Great Depression.

Under UK rules, major investors who have agreed to pursue the same long-term voting strategy have to aggregate shareholdings to ensure that any joint stake of more than 3 percent is disclosed.

Shareholders who "act in concert" also need FSA approval if they own 10 per cent or more of a regulated company's shares under European rules.