The recent Irish Funds Annual Conference marked the 20th anniversary of the event. It also fell on the 40th anniversary of my birth, and what better way to mark the day than participating in a regulatory panel discussion in the National Convention Centre? Here’s what we learned:
The Irish Funds event included a packed agenda and a packed auditorium indicative of the vibrant fund industry in Ireland currently. Now with $4.4 trillion in assets under administration and $2.4 trillion in domiciled assets, Ireland has many reasons to be pleased with itself. As Paschal Donohue, Irish Government’s Minister for Finance pointed out in his address: “Ireland is the third largest fund jurisdiction in the world, and the second largest in Europe… 16,000 jobs which it supports across the country.”
The quantity and quality of delegates and speakers showed that even within this age of social media, conferences remain an excellent source of industry and policy perspectives.
Five key themes stood out:
1. Culture, Trust, and Best Interests
Several regulatory contributors pointed to expectations of greater accountability and tone setting from board of directors and senior management.
“My vision is for a financial services system underpinned by a strong culture of compliance and trust-worthiness, with firms and the people working in those firms acting in the best interests of their customers,” said Derville Rowland, Director General Financial Conduct.
Robert Taylor, Head of Global Asset Management Regulatory Strategy at the Financial Conduct Authority (FCA) also referred to the FCA’s ongoing roll out of a Senior Manager and Certification Regime (SMCR) in the UK. The goal of SMCR is to increase personal accountability for senior staff within financial services firms. This theme is evident in Ireland’s CP86 regulation, an ongoing process aimed at strengthening corporate governance and oversight standards within Irish fund service providers and regulated funds. The CBI also recently conducted culture reviews at retail banks and we expect those lessons learned to soon find their way to the asset management sector. The US is following suit through the SEC’s proposed Regulation Best Interest.
2. “The B Word”
Throughout the conference, one theme was inescapable. So much so that in many instances people said, “the B word” rather than utter its true name. Of course, the issue is Brexit.
There was a palatable level of fatigue from some contributors on the matter. Brexit has been and will continue to be a long road for the industry to travel, but asset managers cannot afford to become complacent. Managers shouldn’t interpret the EU’s tenet that “nothing is agreed, until everything is agreed” as an invitation to procrastinate. Institutional investors dislike uncertainty and expect their firms to act now. Gerry Cross, director of policy and risk at the CBI, says they are seeing “very significant” levels of activity from fund firms seeking authorizations as a direct result of Brexit. A similar story of movement of funds and human capital is also playing out in Luxembourg.
3. ETFs in the Spotlight
Ireland is the second largest ETF domicile in the world so any discussion on ETFs tends to perk up ears within the industry. To put into context, the value of assets in ETFs broke through the $5 trillion mark in February 2018. Given their exponential growth, IOSCO is currently conducting a global assessment of ETFs. They feel it’s important to assess whether there are any ETF-specific risks in terms of liquidity, pricing, market manipulation, or risk of authorised participants stepping away from obligations in stressed markets. The asset management industry should see this as an open invitation and opportunity to proactively work with policymakers to shape the future regulatory framework for ETFs.
4. Investor Value
Another key topic of discussion was the FCA’s 2017 asset management study and the study’s weight of empirical evidence on lack of investor value (net returns after fees). The study suggests that too many funds charge too much for underperformance. The issue of investor value is a prevalent theme across the global asset management sector. Investor and distributor preferences are shifting towards lower-cost passive products, such as ETFs, due to the general sentiment around actively managed funds currently.
However, to paraphrase Irish writer Oscar Wilde, a cynic is “a man who knows the price of everything but the value of nothing.” If one applies this to the current asset management debate on cost, a cynic would suggest that all active funds are overpriced or underperforming. In reality, it’s a case of investors looking in the right place for value. There remains a large number of active asset managers with reputable brands, providing good risk adjusted performance at the right price, as well as a positive client experience throughout the life of the investment. So, investors and distributors also have a role to play to ensure they find value for money. Many asset managers welcome this heightened focus on fees, value, and accountability as it affords them an opportunity to better demonstrate their value proposition.
5. Period of Recalibration
There were numerous references from speakers to current and future reviews of existing regulations including UCITS, AIFMD, ETF rules, and PRIIPs to make them more fit for purpose. We have suggested before that we’re in a period of regulatory recalibration rather than a wave of new regulations. A decade on from the global financial crisis, additional “mega regulations” are not warranted however the continued process of tweaks and fine tuning will continue for the foreseeable future. As such, it’s important for asset managers to continually assess regulatory change to ensure timely compliance and if possible, take business advantage.