What does 2021 hold for the asset management industry?
The opening session saw David Gauke, head of public policy at Macfarlanes, joined by Chris Cummings, chief executive of the Investment Association and Michael Moore, director general of the BVCA, to discuss key challenges facing the asset management industry over the coming year. The discussion drew a number of conclusions, including those highlighted below.
The asset management industry is probably as well prepared for Brexit as it can be: firms have long since accepted the reality that, even if a deal were to be agreed, it would be so “thin” on financial services that they should plan for no deal. Of greater concern is whether the wider economy is ready – particularly those sectors in which firms’ investee companies operate. Even if there is a deal, there will be significant changes for the economy as a whole, and some sectors may just not be ready for what is coming.
The benefits of concluding a deal, even one offering little to the financial services sector, would be substantial: a deal would bring clarity, minimise barriers to trade for some sectors (if not financial services) and, intangibly but perhaps most importantly, set the scene for the future on more solid foundations.
If a deal cannot be reached, it will be time for cool heads: regulators in the UK and the EU will need to continue to trust each other and continue to share data, information and insights. De-politicised regulatory co-operation can hold markets together, even in times of great stress. The industry will need to play its part in bringing this about – the baton should not be passed entirely onto regulators and governments. This means structured engagement with regulators – in the UK, across Europe and more widely – to emphasise the need to avoid artificial impediments to trade, and to help regulators brief policy makers on how best to de-escalate any tensions.
The focus should be on setting and maintaining appropriate international standards, something that ought to be in the shared interests of both the UK and the EU. The UK has historically had significant influence in international standard setting and now would be a good time for the UK to play an even larger role in this area. The more that overarching regulatory standards can be agreed at a global level, with suitable flexibility for different practices in different markets, the less important divergence between the precise wording of the UK and EU rulebooks becomes. There is no desire for the UK to engage in a race to lower regulatory standards, or to be different for the sake of it, but there is a case for flexibility in the application of certain standards in certain circumstances. The industry should be arguing for future regulatory flexibility, rather than future regulatory divergence.
Delegation arrangements work because they work for investors: delegation delivers efficiencies and better results for investors and opens investor access to global investment expertise. Any discussions with the EU authorities about the future of delegation – in the context of recent ESMA publications and the AIFMD review – should aim to satisfy them that the international standards around delegation currently work for the benefit, not of the industry, but of investors. Disrupting international norms on delegation would ultimately result in disruption to investors.
In the face of unprecedented challenges, the industry was remarkably resilient. In March alone, £10bn was withdrawn from UK funds – the biggest ever monthly net outflow – and yet the public markets remained open and redemptions were honoured. Since then, the industry has helped raise over £17bn of new equity for 60 FTSE companies, to support those businesses through the crisis. In the private markets, the core of the investment model – engaged investors who participate actively at investee company board level – has been validated over recent months, as firms have been able to help their investee companies navigate the crisis and adapt.
The broader economic recovery will need to be UK-wide, aligned with the government’s “levelling up” agenda. The industry’s investment footprint is already UK-wide, so the industry is well placed to be a strong agent of the recovery, investing across the UK. It is in the industry’s interests to ensure that businesses pull through, and if follow-on capital is needed, firms will provide it. The prospect of the new Long-Term Asset Fund (LTAF) – which the Chancellor recently committed to launch in 2021 – is also an important development. The aim of the LTAF is to broaden the pool of capital that can be invested in longer-term, more illiquid, investments, potentially increasing capital flows into sectors that can underpin the UK’s economic recovery.
ESG has become mainstream: it is no longer a product solution or niche aspect, but an investment philosophy. It is driven by investor – and wider societal – demand. All businesses depend on a licence to operate; for the asset management industry, this used to be dependent on generating economic value, but firms are now expected to develop public or social value too. There is a lot more work to be done, particularly around data and measurement of ESG factors, but now is the time for the industry to demonstrate that it is investing for the long term in the companies of the future.
The industry must get used to a more interventionist government – as illustrated, for example, by the new National Security and Investment Bill. There will also be a debate about tax, for which the industry is ready. It is important that people pay their share; it is vital though that this is done in a way that gets balance right between incentivising economic activity and taxing appropriately. But this era of greater governmental intervention presents the industry with an opportunity to engage with government, to help shape the post-Brexit, post-Covid economy, and to ensure the UK remains a pre-eminent financial services centre. The tax and regulatory environment, as well as the immigration structure, must work in harmony to support this ambition.
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