It’s been a challenging year for the investment industry. Leaving aside the market turmoil created by a series of geopolitical surprises for the moment, the year started as it ended – largely in the shadow of the FCA’s asset management market study. With the final report due from the regulator in early Spring next year, it will also set the tone for much of 2017.
Thus far, that tone is not particularly positive. The report was fairly scathing in its assessment of the industry’s ability to deliver value for money to end investors, and ultimately criticised the industry for being ‘too profitable’ and poorly governed, proposing a set of corrective reforms and, in all probability, referral to the CMA for effective collusion at the expense of the investing public. Investment consultants fared even worse.
It’s at times like these when you get to know who your friends are. And the silence from defenders and supporters of the industry has been incredible. In the immediate aftermath of the report, the media coverage was entirely one way and the few asset managers who did publicly comment said little other than bland, welcoming platitudes. Since then, a little disquiet has percolated out into the trade media about what some of the FCA’s recommendations may actually mean for investors, but to the outside world the industry appears to stand alone and largely unloved.
For an industry which does genuinely deliver social value through allocation of capital in the real economy and managing retirement savings, this should be a cause for concern. Asset managers now occupy the same place as banks and insurance companies have done: very much in regulators and policymakers sights. For an industry that has purposefully flown ‘below the radar’ in recent years, this is an uncomfortable position. The problem that the industry has is that once you are held above the parapet, it’s very difficult – if not impossible – to get back below it. So, a key challenge for the industry next year is how to live, and ultimately thrive, in the spotlight. Any notion that the industry can simply make a few accessions to the regulator and carry on as normal should not be entertained. That won’t cut it at all.
Life in the public eye is always a difficult balancing act. It’s interesting to note that, after years of public excoriation, the hedge fund industry has started to both engage with the general public and parliament, while in the US the private equity industry had started to wield much greater political influence even before the recent election. Equally, the banking and insurance sectors aren’t shy of occasionally flexing a little muscle to protect their interests, hence the shift in the FCA’s attention away from banking culture. Keeping your powder dry is a good tactic, but only if you know that you are going to get to use it before its already too late.
There are clearly issues that can work in the investment industry’s favour. The UK needs a thriving financial services sector, with asset management at the heart, and the government is certainly cognisant that we will need to work harder to make ourselves attractive as a financial centre post-Brexit. London is home to some of the greatest investment businesses and investors in the world. The impact of losing that would be hugely damaging, economically and socially.
There’s little or no precedent of reversing the findings of an FCA study between interim and final stage, so another question is how much energy and resources to expend trying to reverse the regulator’s views. In the weeks since the study was published, for example, concern over the actual impact of all-in pricing has started to grow – although little of this has permeated into the outside world. Could all-in pricing actually lead to greater costs to the end investor, or reduced returns through reduced response to key market events? After all, it seems logical that trading activity over the course of 2016 will be even higher than many would have expected a year ago given those unexpected political outcomes we’ve had this year. Changing the regulator’s view is also more challenging because of the industry’s prior acquiescence on this front. Key to this has to be the continuing threat of CMA referral – so asset managers need to clearly prove that they have not colluded against the public interest.
Whilst substantial, the challenges facing the industry are by no means insurmountable. It’s important that companies understand the importance of both collective and individual engagement with their broader stakeholder group. Collective action is important, but once in the public eye it’s difficult to protect your reputation purely as part of a wider group. Equally, it’s important that companies ensure that both their external and internal communications is fit for purpose. Given the level of change that the regulator is trying to engender, internal communications will be as important as external in ensuring that fund businesses remain on course.
2017 will have its challenges, but that creates tremendous opportunities. At Lansons, we would value the chance to help you take those on.
This article featured in the December 2016 issue of our quarterly newsletter. You can sign up here to receive it here.