Author: Maha Khan Phillips
Last year was challenging. This year will bring its own considerations for asset managers, says Andy Pettit.
2020 was a year that dealt a series of unique challenges on both a professional and personal level, with the ongoing global spread of COVID-19, increased market volatility and political events played out on the world stage. Now as we turn our attention to 2021, we can assume that regulation will continue to be a key driver of asset managers’ priorities. Post-Brexit life, a new head at the Financial Conduct Authority (FCA), pandemic recovery plans and hosting the largest gathering of world leaders the UK has ever seen will all play their part. There will be other areas where asset managers will need to place their focus:
The Continued Rise of ESG
The delayed COP26 United Nations climate summit in Glasgow in November will surely be a catalyst, if one is needed, to continue the stream of environmental, social and governance work. 2021 is a pivotal year for various components of the EU Sustainable Finance Action Plan and the UK government has previously committed to matching its ambitions. Post-Brexit, various parts of the EU plan will not be implemented in the UK and firms await details of the regime that will apply to them instead.
Broadly, three factors need to be dealt with. Firstly, disclosures, to prevent firms exaggerating their ESG credentials, or ‘greenwashing’, by requiring more descriptive objectives together with metrics to evaluate progress toward meeting them. Those metrics will increasingly be tied to a taxonomy defining which business activities are deemed sustainable actives.
Second, sustainability will need to be embedded into firm’s investment processes, both in terms of considering ESG risks to investments, and in terms of identifying any adverse impacts that selected investments may have on sustainability – so called double-materiality.
The third factor will be incorporation of ESG factors into product governance and target market identification, in part to help advisers match products to their client’s investment and ESG aims.
Focus on Value
The FCA’s required assessments of value were a 2020 success story. Fund boards must oversee an annual assessment of their fund range and decide whether they have offered overall value to investors in relation to the charges levied.
Consequently, we’ve seen many investors moved into cheaper share classes; funds reducing fees; and others being merged or closed. Round 2, in 2021, will be interesting, both to see the extent of further changes and how the assessment reporting itself evolves.
Whether or not firms take a view that the most impactful changes have now been done, a number of funds were put on watch and investors will be looking to see how they have responded. The reports themselves were a mixed bag in terms of engagement and readability for investors and will hopefully improve as firms review their peers work and as the FCA evaluate the first set.
Liquidity and Capital Requirements
Asset managers can expect continued work on the liquidity of funds and their portfolio holdings. In the spotlight since the Woodford fund issues erupted in the summer of 2019, it resurfaced again with suspensions of some open-ended property funds in the pandemic induced market volatility.
Regulators continue to evolve the rules that guide firms on ensuring that their products can meet redemptions at the frequency they set out in their prospectus terms. There is also the prospect of a new type of fund structure designed specifically for holding longer term, less tradable investments, like real estate, infrastructure and unlisted securities.
At a macro level, firms will also need to ready themselves for a new prudential regulatory regime. Previously tasked with requirements designed principally for banks, the new rules will see capital requirement calculations focused specifically around the nature of investment firm’s business.
Putting Consumers First
The FCA will conclude the last part of a three-pronged review of issues relating to the consumer investment market. The first two components looked at progress made by the retail distribution review and the financial advice market review. The concluding part looks more specifically at where markets aren’t working well for customers.
The areas of investigation range from what else could be done to help the market offer a range of products to meet straightforward investment needs; through making it easier for people to understand the risks of investment and the level of regulatory protection afforded to them; to how best to ensure that when people lose money because of an act or omission of a regulated firm, they are appropriately compensated and that it is paid for fairly by those who cause the loss.
The overarching continuing theme is how to facilitate effective competition and encourage firms to develop innovative products and services which help to encourage more consumers to invest in addition to saving.
As the Treasury develops plans to restore the nation’s finances post the pandemic, amendments to taxation must be likely.
Which taxes and what changes are unknown at this time. However, one indicator was the recent interim report from the Office of Tax Simplification, exploring changes to the capital gains regime and aligning it more closely with income taxes. Whether or not they progress, and to what extent any changes directly impact asset managers, tax will be another item on their watchlists.
Overall then, asset managers can expect another busy year in 2021. Investors will be looking to them for good value products that will assist in rebalancing their portfolios after this year’s volatile markets and in finding sources of income in a continuing low-yield environment. This against the backdrop of continued growth of interest in ESG investments, alongside the active versus passive and growth versus value debates.
Andy Pettit, Director of Policy Research at Morningstar. Andy works on policy activities that support investors’ interests, develops policy thought leadership, and monitors changes in legislation and regulation that will have an impact on Morningstar and its clients.
Previously he led Morningstar’s Data Research and Methodology teams, driving content strategy and developing new methodologies. Andy has more than 30 years of experience in the financial information industry, accumulated in data management, technology, and performance measurement standards. He has held seats on many industry standards and statistics committees and was formerly vice president of global data operations at Standard & Poor’s Investment Services.