The UK investment management industry’s reputation has been tested like never before in 2019. The suspension and now imminent closure of one high profile fund has cast a long shadow and led to a broader discussion about the role of fund managers, and how companies look after the savings of people across the country.
Much has been said about the lessons to learn from the Woodford Equity Income fund. While we are aware of the regulatory investigations, the Investment Association and its members have already been reflecting deeply and taking action where needed.
We operate in an environment where demonstrably high standards of governance and oversight are more important than ever. That is why we strongly support the regulatory measures that will see a new value assessment and reporting process for investment funds.
The role played by new independent non-executive directors should also provide a level of additional challenge and perspective. And this all takes place against a backdrop of greater emphasis on culture in the investment industry.
Helping savers to better understand how the industry works and how their money is invested is a priority. Already there are significant changes to fund communication materials. Next year further work will be done on both fund and wider industry communications, reaching out to savers and investors in a jargon-free language that resonates with them.
It is important that this work does not take place in isolation. Investment managers rely on financial advisers and distribution platforms as the immediate touch point with customers. Ensuring that the whole chain works seamlessly together to deliver the best outcomes is essential.
There is of course a central theme in the governance and communication questions being asked around the Woodford episode: liquidity management. This in turn goes to the heart of the debate about the investment management industry’s role in the wider economy, partly focused on how we can help to increase the supply of so-called patient capital — a form of long-term investment — to help finance companies, or infrastructure for local communities.
From a regulatory perspective, the Bank of England and the Financial Conduct Authority have also been evaluating whether there is a connection between fund liquidity and financial stability. The global financial crisis saw the fund management industry tested in the harshest conditions and come through positively. However, times change and this is an important piece of work that we hope will recognise the role funds play in helping to manage risk, not create risk for individuals or the wider economy.
Separating the different components of the liquidity debate is a challenge, but there are clear starting points.
Where poor practice or communication is identified, we must move quickly to ensure demonstrable improvement. While it may be some comfort that suspensions are rare, it is of no comfort to those who are locked into a fund and face material loss.
Where there is potential for liquidity issues in certain market conditions, such as those after the 2016 Brexit referendum, we need to act quickly to ensure the right framework is in place to protect UK savers and investors. Our view is the existing regime for authorised funds, notably Ucits, is fundamentally fit for purpose, with room to improve the toolkit for liquidity management. The IA is working on guidance to help ensure consistency and to highlight good practice.
Where funds invest in fundamentally illiquid assets — you cannot sell a bridge or a holding in a private company overnight — there is a strong argument for moving beyond a daily dealing environment, while continuing to offer the highest standards of investor protection and governance. This is why the IA believes the fund universe could be enhanced by allowing people to invest in illiquid assets over longer time horizons. We are currently further developing our blueprint for an innovative long-term asset fund.
The industry faces a year of change and scrutiny in 2020. It is for us to ensure this is ultimately for the good of the savers and investors who are relying ever more on investment funds to help them achieve their financial goals.
Chris Cummings is chief executive of the Investment Association, the UK fund management trade body