By Luuk Jacobs
By Eva Keogan
By Jonathan Max
By Luuk Jacobs
By Andy Milner
By Lydia Francis
The following is a brief overview of the Treasury Select Committee meeting with the Financial Conduct Authority on 25th June 2019.
Woodford Investment Management
Unsurprisingly, the highly anticipated subject of Woodford Investment Management’s (WIM) shortcomings was the first topic for discussion at the meeting.
The following observations are FSTP’s own view of the possible implications of Woodford Investment Management’s demise (we still don’t know what we don’t know and feel this subject has got some distance to run before all the facts are known).
This failure of a retail fund will have serious and lasting impact on the operation of Asset Management in the UK.
It throws into sharp relief the requirements falling out of the FCA’s Asset Management Market Study, in particular the need for independent Non-Executive Directors (NED) to challenge at Authorised Fund Manager (AFM) level and the production of qualitative value for money statements for all UK funds.
From what we heard, we suspect there will be changes to the rules governing the liquidity of funds which retail investors are able to invest in. Andrew Bailey (FCA’s CEO) highlighted the Regulator’s view that European Union (EU) legislation has failed to manage retail funds. However, FSTP is concerned about an over reliance on principles based regulation (i.e. living within the ‘spirit of the rules’) in this area of Financial Services. Our clients operating in this arena are always looking for clarity and are generally welcoming of prescriptive rules in this area.
Despite the introduction of formalised rules on product governance via MiFID II’s implementation in January 2018, distributor/manufacturer relationships and due diligence arrangements appear to be falling well short of regulatory expectations. We surmise that this is likely to result in a greater degree of regulatory intervention.
The remuneration of individuals will attract the attention of the wider media and public as this situation develops. In this instance the Senior Managers and major beneficiaries of fees charged are one and the same. On the face of it there appears to be precious little individual accountability and a lack of challenge by others – the prevailing attitude seemingly being, “We pay ourselves what we think we are worth”. However, when that premise is built upon the investments of retail investors (bear in mind how much pension fund money will be tied up here) there has to be a day of reckoning. The message? If you are not providing retail investors with the service they have been led to expect, you cannot continue to reward yourselves so disproportionately. In short, Senior Managers must now be seen to be taking a more overt, moral stand on what is right and fair.
Bailey was very strict to follow what he’s already told the media and the Committee’s Chair Nicky Morgan’s question, “Does anyone at the FCA read the papers and listen to what’s going on in the industry?” received a curt reply.
The question, “Is it a failure of rules, or a failure of FCA supervision?” received a straight forward response of, “A failure of rules”, with Bailey’s reasoning being that whilst WIM has often had long periods of strong performance and long periods of poor performance, in this instance it is has not been able to save the situation, or the many reputations that have been tarnished as a result.
The responsibilities of Link – the AFM for Woodford Funds – was centred on by Bailey who reiterated the regulatory contact that is now well publicised. The Committee observed that Link – previously owned by Capita – did not have a good record of managing Investment Managers on behalf of investors, given they were at the centre of the Arch Cru issues. (N.B. An article in the FT on 25 June alleges that the FCA pressured WIM into using the services of Link – as the largest provider of ACD services – in order for the necessary regulatory permissions to be granted).
The relationship between WIM and Hargreaves Lansdown (HL) was raised by the Committee and it became obvious that once the immediate issue of fund liquidity is resolved, a review of the relationship between distributors and manufacturers will be instigated. (N.B at the Investment Association’s annual Policy Conference on Wednesday (26 June) Morgan remarked that the methodology behind Wealth 50’s composition raised questions as to whether customers are being treated fairly, after the TSC received a letter from HL confirming that its influential Wealth 50 list was not solely compiled on performance and that WIM’s inclusion on the list, despite under performance, was impacted by fee discounts offered to the platform).
Justice for individuals
A common theme throughout the discussion was ‘justice for individuals’. There is a high degree of dissatisfaction with the complexity of regulation and the consequent lack of clarity for consumers and practitioners alike, with the suggestion being made for the FCA to sort their impenetrable verbiage as most people don’t understand certain aspects such as T&Cs. This concept was understood by attendees from the FCA, who proceeded to mention that they do have enough resources to deal with all issues, and a review of systems and capabilities needs to be looked into.
The FCA was forced to comment on its responsibilities under the Equality Act, bearing in mind TSC’s disappointment with the Regulator’s response to the report, ‘Consumers’ Access to Financial Services’, published by the Committee in May 2019. FCA’s Chairman, Charles Randell, stated that this is, “By no means us saying we don’t take our responsibility to consumer vulnerability very seriously”.
Culture was brought into question and Randell mentioned that the FCA’s focus is shifting to outcomes supported by principles. After some bad tempered exchanges Rushanara Ali, MP quipped, “Some would argue that you are not tough enough with bank bosses…are you too nice to bankers. Is it better to be feared, than liked or loved?” Bailey’s quick response of, “I don’t get up in the morning hoping people will love me”, will surely resonate for some time. He also added the FCA has 650 investigations currently underway, compared to the 250 when he took on the role.
Of course, Brexit did rear its head and Bailey made frequent references throughout the discussion to the fact that regardless of the issues raised and the revisions suggested, Brexit will have a big impact on the FCA’s plans, such as the intended investment in data analytics. However there will be one area that can be assured of relatively no change post-Brexit, the Senior Managers & Certification Regime – it was made clear that the Regime will be implemented in its entirety.
Overall, Randell (above left) and Bailey (above right) held their own against some intense questioning, but one wonders how much Bailey’s ambition to be the next Governor of the Bank of England tempered his responses.
This was first published on the FTSP LLP blog.
By Eva Keogan
We all want to love our jobs but what if the environment you are working in doesn't love you back? That's something many women are facing daily. Sexism is such an old fashioned concept and it’s really time for it to go, but it still exists. How can firms stamp it out when it seems to be ubiquitous?
You may have spotted the headlines recently about the Lean In survey which found 60% of male managers are ‘uncomfortable participating in a common work activity with a woman, such as mentoring, working alone, or socialising together’.
The choice of wording used is a bad start as it immediately puts the man in the role of the victim, with him being the one made to feel ‘uncomfortable’. And the study finds even worse thinking.
Apparently, senior male professionals are less likely to fraternise with junior females than they are with junior males. This is underpinned by these startling statistics:
Men are 12x more likely to hesitate to have 1-on-1 meetings with women Men are 9x more likely to hesitate to travel together for work with women Men are 6x more likely to hesitate to have work dinners with women
And to top it off, 36% of men say they’ve avoided mentoring or socialising with a woman because they were nervous about how it would look.
If we look at these figures from the other side it becomes even more alarming – women are 12x less likely to get a meeting with a senior manager. Women are 9x less likely to get go on business trips. Women are 6x less like to be invited to work dinners.
Yet this doesn't seem to be a case of fixing one problem and causing another, as 57% of women still report that they’ve experienced some form of sexual harassment in the workplace.
So what exactly is going on here? It's surely enough to put many women off working in a corporate environment altogether.
Data and Facts
While it’s always difficult to apply generic survey data to a particular industry – especially when it’s a sample size of 2000 and generated in the US – there’s no denying that these issues are global, and that sexism and sexual harassment are still rife in the City of London.
In 2017, the FTfm Women in Asset Management Survey found 70% of women have been the subject of sexism. That’s pretty depressing.
It’s really important for everyone to enjoy work – we work longer hours in the UK than our European counterparts and the City is no exception. But while on the one hand we have diversity drives, returnships and Gender Pay Gap reporting designed to give women and other groups support and reassurance through legislation and behaviour change campaigns, recent stories coming out of the City at large show types of misconduct such as sexism, exploitation and at the very least crass jokes, are by no means going away any time soon.
The Toxic City?
News stories around sexism in the City aren't positive at the moment - here are just some which have made the news:
James Conmy and his ‘glazed ring’ comment ended up with him being fired. The Bloomberg exposé The Old Daytime-Drinking, Sexual-Harassing Ways Are Thriving at Lloyd’s which contributed to the banning of alcohol. Coutts is facing a significant pay out to a female employee of its ‘unspoken culture of sexism’. In February 2019, the FCA met Nathalie Abildgaard, a former employee of IFM Investors, an Australian investment manager with an office on Gresham Street, to discuss her claim that a senior manager sexually harassed her on a work trip – she has settled out of court this April for a six figure sum.
With all of this on the table it’s quite easy to lose faith in change at all but we just can’t give up and go home if we want to see change.
Who is responsible?
Organisations themselves are responsible for their own culture but they need more than a gentle nudge. Campaigns such as Women in Finance are pushing for the numbers of women in the industry to increase.
The Investment Association also has a role to play. It currently campaigns around Diversity & Inclusion as well and while it has written to FTSE 350 companies about diversity it has not been so vocal about sexism in the industry itself – but is this something it should champion or should it tackle broader issues? The Diversity Project, the campaign set up to promote Diversity & Inclusion in the industry has a broad remit across the diversity spectrum and is a force for good overall but holds no power to enforce rules or regulation.
All the above are working towards change but it is only when there is jeopardy, or high stakes, we will see any kind of radical reform or progress.
Calling out to the FCA
When it comes to any kind of enforcement, the FCA is the only organisation with real teeth and it has stated over the last few months sexual harassment falls within its remit, so perhaps we will start to see some tangible movement on the issue.
Speaking at City and Financial's Women in Finance Summit 2019 this month, Nausicaa Delfas, executive director of international at the FCA, pointed to an increase in non-financial misconduct as a threat to the sector's diversity.
"This type of serious misbehaviour is toxic to a working environment and can lead to bad outcomes for customers, staff, stakeholders and the firm. In our view, tolerance of this sort of misconduct would be a clear example of a driver of unhealthy culture. This area clearly requires management attention and a broader change in the firms’ mindset."
Will this effect change?
First and foremost, we’ve seen little change in the Gender Pay Gap reporting figures so should women expect much else to change? Yes of course women should.
According to Wealth Manager ‘The FCA has said firms need to demonstrate good practice in purpose, leadership, rewarding and managing people, and governance arrangements.'
With SMCR coming into play in December 2019, company culture is being given increasing importance in the Investment Management sector, and the risk of high profile fines for senior management and directors from the regulator may encourage organisations to stamp out any form of misconduct – sexual or otherwise – more quickly than before.
Let’s hope 2020 sees a step change in stamping out sexism and misconduct for once and for all and we can all enjoy our jobs, regardless of gender or identity.
By Pierre-Yves Rahari
The FCA outlined earlier this week, through the voice of CEO Andrew Bailey, the blueprint of the regulator's approach post-Brexit. In short - the way I read it - the FCA will aim to regulate towards outcomes in line with the European standards ("no race to the bottom") while operating with a hands' off approach ("principles and outcome based"). This is a very tight rope to walk ... Indeed, as I see it, the future UK regulation will need to be aligned with the European one, to ensure continuation of fluid collaboration and cooperation (the Europeans were quite clear on that matter during the Brexit talks), which the FCA is keen to deliver on. At the same time, the FCA seems to be responding to clamours of "too-much-regulation," which emerges regularly from some ranks of the Investment Management industry. I take the view that the FCA post-crisis approach - in line with most European regulators - has been to influence the resolution of issues that our industry is struggling to cope with on its own: Investor protection, transparency on costs, adequate governance models, conduct standards, diversity models and so on. This, to me, amounts to influencing a change of culture in our industry (which does not mean questioning the raison-d'être of the industry, i.e. increase the value of capital entrusted to us). Anyway, ten years of post-crisis regulation has brought some constructive changes to the industry, and some challenges, too, but I am not sure all has been achieved; it takes time to undertake a culture change as ambitious as the one we are tackling. As such, I find it risky that the FCA should lift their foot from the pedal so soon. In my opinion, the odds are high that the industry reverts to pre-crisis behaviours, if the regulator is already signalling that they will relax their grip on execution. I really want to hope that a change in approach will get to the ambitious outcomes that the industry needs, but we have been there before and failed to deliver. What would be different this time?
Or am I seeing the glass half empty?
By Luuk Jacobs
The FCA published last week it's Research Agenda for 2019 (2019 fca-research-agenda.pdf). Their focus will be on
household finance and consumer behaviour
household finance and consumer behaviour securities markets: microstructure, integrity and stability competition, innovation, and firm behaviour and culture technology, big data, and artificial intelligence regulatory efficiency and effectiveness
The 3rd objective seems to bring the discussion previously focussed on pricing in general to the more sophisticated pricing which increasingly uses technology and big data to set prices, and often use predictive analytics to personalise prices.
The 4th objective aims to better understand how the developments in technology, big data, and artificial intelligence are shifting market economics, the resulting benefits and harms and implications for regulation.
All this with the aim to ensure that their regulatory interventions achieve their objectives of making efficient use of their and industry’s resources. From an external perspective, they want to achieve a regulatory regime that promotes and supports effective financial markets while minimising their costs to society.
I am looking forward to their research outcomes and the future regulations that is designed on the back of it
By Colin Ng
Larry Fink's Letter to CEOs | BlackRock
WWW.BLACKROCK.COM In his annual letter on corporate governance, BlackRock CEO Larry Fink explores how companies can achieve long-term financial returns
Quite a long read but articulate and well written.
It echos with a lot of the current and new generation of investors and workers.