Richard Withers, Head of Government Relations in Europe at Vanguard Asset Management, discusses the key issues and trends shaping the global regulatory landscape.
- What is the biggest regulatory challenge asset managers will face in 2018?
Outside of Brexit, I believe the biggest regulatory challenge facing asset managers right now is the ongoing policymaker focus on fund costs, charges, net returns, and the related question as to whether their products and services offer value for money. End-investor value for money is a focus at Vanguard, and we believe in ensuring there is effective price competition to help level the playing field, enable greater innovation, and improve investor choice. If regulators and the industry focus on addressing these issues, ultimately it will improve the financial well-being of millions.
- MiFID 2 dominated headlines in 2017. What will be the top story of 2018?
I think we will still be talking about MiFID 2 in 2018 as its implementation beds down. Like the original directive, MiFID 2 will have a long-term impact for investment firms. The requirement that investors are provided with a “total cost of investing” figure will have a profound effect on investors’ awareness of costs incurred in purchasing a fund and their understanding of the impact of costs on net returns. As a result, we may see further scrutiny and pressure on costs, providing a tailwind to the recent trend towards lower cost funds and intermediary services.
While MiFID 2 will have many positive consequences in 2018, I also expect that we will start hearing noise about possible tweaks to the MiFID 2 regime in the coming years. I could envision pressure to:
- require that the total cost of investing is more simply and accurately displayed to end investors
- revisit how the transaction costs element of the total cost of investing is calculated
- close the gap between independent financial advisers and discretionary portfolio managers that are not permitted to accept and retain inducements from product providers and non-independent financial advisers that can
It will also be interesting to see whether MiFID 2 results in a comprehensive consolidated trading tape, or whether a MiFID 3 needs to be enacted to require this service to be provided on a public utility basis.
- What is the biggest open policy debate likely to advance or conclude in 2018?
EU: There has not yet been any immediate, notable change to EU policymaking, because the UK remains an EU Member State for the time being (admittedly with reduced influence). Going forward, I would expect there to be an increasing focus on the development of a single/more harmonized EU capital market, which is able to compete with and have less dependence on the UK. I am hopeful this can be achieved through regulation that encourages cross-border competition, rather than through protectionist policies.
UK: In the short-term I believe we can expect the UK to retain EU rules, whether as an EU member state or in order to ensure a high degree of regulatory alignment between the UK and the EU on financial services matters. That said, clearly there is the scope for increased UK regulatory flexibility post-Brexit and I expect that we will increasingly see divergence between EU and UK policymaking. As such, I would expect that UK-based asset managers will see an ever-greater influence of UK policymakers going forward.
Global: Without the same influence at the EU policy table, it would appear critical that the UK maintains a strong influence at a global level, for example in the design of IOSCO global standards. This will be particularly important for asset managers with both UK and non-UK businesses so that they can operate these businesses with as minimal divergence as possible.
- Regulators seem to have their eyes on ETFs. Will we see ETF specific regulation in 2018?
As competitive tailwinds result in further increases in the assets invested in ETFs, I expect regulators will understandably remain focused on ETFs. In this regard, it is important for us to recognize the positive impacts that ETFs bring to retail investors including: broad diversification, trading flexibility, and lower costs. They also benefit markets more generally as an additional source of intraday liquidity and by providing valuable information about market conditions.
Although sometimes portrayed as unique instruments, ETFs are comparable to traditional mutual funds. As such, we believe it is important to allow them to continue to be categorised and regulated under the existing well-established regimes, such as the UCITS Directive. Alternative approaches could risk damaging existing regulatory brands and impose unnecessary complications for investors. So far, we haven’t seen that the increased volumes in ETFs have led to any strain in the ETF architecture. ETFs remain a small percentage of the overall funds market and stock market activity.
Given it represents the essential difference between mutual funds and ETFs, we expect policymakers to continue to focus on the role of authorised participants (APs) and liquidity providers in establishing the spreads at which ETFs trade and the connection between secondary ETF market activity and the underlying primary markets. We recognize the important role played by APs and liquidity providers, but our experience also suggests that the economic incentives available to these market participants means a robust arbitrage mechanism exists even in periods of stress.
- Are regulators keeping up with technology’s disruption of asset management?
I think it’s fair to say that no matter the industry, the pace of technological change has outstripped regulatory reform and it’s no different in asset management. That said, we’ve seen positive steps by policymakers to understand the opportunities and challenges that FinTech can bring and, where relevant, to facilitate its positive disruption.
Unsurprisingly, one area that I see continued disruptive potential is in the case of technology-enabled investment advice. To maximise the full potential of robo-advisors, we believe it is important that regulators are convinced of the “alpha” – or added value of advice, the role that technology can play in making advice more affordable and accessible, and the need for consumers to have a sliding scale of advice and guidance options to match their wishes, needs, and disposable income.
This article was originally published in the 2018 Regulatory Field Guide. The guide features insights from a number of our experts on key regulatory developments that will have the greatest impact for asset managers in the year ahead – and beyond. Visit bbh.com/regulatoryfieldguide to explore the guide.
Richard Withers is Vanguard’s European Head of Government Relations. In this role, he is responsible for formulating the development and prioritization of Vanguard’s positions on legislative and regulatory developments throughout Europe and engaging with European policymakers and regulators. He joined Vanguard in December 2012, initially in a Legal role and subsequently led Vanguard’s European Compliance team. Prior to joining Vanguard, Richard worked for two London based international law firms.
The positions expressed are those of the author as of 1/14/18 and may or may not be consistent with the views of Brown Brothers Harriman & Co. and its subsidiaries and affiliates (“BBH”), and are intended for informational purposes only. Information contained herein is based upon various sources believed to be reliable and subject to change without notice. Furthermore, these positions are not intended to predict or guarantee the future performance of any currencies or markets. This material should not be construed as research or as investment, legal or tax advice, nor should it be considered information sufficient upon which to base an investment decision.