Beginning the cultural revolution

The asset management sector  needs to reset its interaction with the outside world and win over the sceptics.

It will not achieve that alone.

The reputational damage to the asset management industry from the issues around the gating of Woodford Equity Income Fund, and the subsequent winding up of its investment manager, will be long lasting.

The investment industry is now under intense pressure and is struggling to contend with the harsh glare of public scrutiny. Whilst there are a variety of factors at play, the poor reputation of asset management is not helping it win friends or attract new business.

Culture lies at the heart of this but making the changes necessary to mitigate that is going to take a huge effort. Many of the challenges won’t be resolved by asset managers in isolation.

To the outside world, it must currently appear as if asset managers aren’t subject to the same standards as everyone else. Even to a more informed perspective, it’s not difficult to conclude that internal controls aren’t being implemented effectively.

But whether the specific issue under the spotlight is personal trading, product mislabelling or inappropriate conduct, it all points to a major shortcoming – poor culture.

And this isn’t just an issue with the fund management sector, its a problem across financial services.

The response of the regulator has been to introduce the Senior Manager and Certification Regime (SCMR). Introduced a year ago for banks, the rules are now being implemented across the rest of financial services, coming into force from 9th December.

Dreamt up in the wake of the politically enforced curtailment of the FCA’s investigation into banking culture, SCMR was initially cultural regulation by the back door. In the last couple of years as concerns about behaviour in the sector has increased, the FCA has become much more open about its specific objectives.

But culture should not just be about compliance.

In fact, all regulation can really do is set a base line, a minimum set of standards to which companies need to adhere to so that they can be deemed credible by their clientele. If all fund management firms do to improve culture is to try to tick a series of boxes then ultimately they will fail.

Cultural reform needs to be led from the very top of an organisation, and it needs to be something that the whole company can buy into. Many compliance heads say, privately at least, that getting risk takers‘ approval remains difficult, so a holistic, company-wide approach is important for success.

Nor should culture just be about rules and controls.

Asset management suffers from a sizeable gender pay gap, and diversity of all types across the industry is poor.

This is particularly true in the two key cost centres in any fund firm – portfolio management and sales. Making real change to these areas will take both time and considerable effort.

There are sizeable structural challenges to this. The supply chain of which asset management is part penalises change and corporate instability, yet at the same time those buying asset management services want to see diversity increase.

It’s a real conundrum and one which fund management cannot solve in isolation.

There are many other areas where asset management needs to improve, not least in how it communicates externally. Too much of what comes out of the industry in the shape of ‘marketing’ seems designed to obscure as much as it is to inform.

Transparency is not just about what you reveal, it’s also about how you reveal it. Accusations of opacity often highlight poor articulation as much as deliberate obfuscation. Information is only of value if the recipient can utilise it effectively.

There is also a commercial imperative. Ultimately, reputation defines whether people will do business with you, over time.

Therefore, the continuing outflows from the UK fund management industry, as per the latest update from the Investment Association, is a red flag that the sector must not ignore.

True, Brexit uncertainty is not helping but this is at a time when overall flows should be supported by auto enrolment and DB transfers. In that context, £11 billion of fund outflows in the last year to end September is troubling.

It is unlikely that the outcome of the General Election will reduce the long-term pressure on fund managers. There might just be some post-Brexit respite, but the need to improve behaviour and culture and reboot reputations will endure.

The alternative will be further and harsher regulatory intervention, and it’s hard to see who the real winners will be from that.

 

 

To receive expert insights on asset management straight to your inbox sign up for our newsletter.