There is no question that regardless of all the banker bashing and general dislike of financial services the sector remains very important to the UK.
It accounts for over 12% of GDP directly, two million jobs and represents a very clear advantage for our country in terms of global competitiveness.
Within this sector, asset management is pretty much the jewel in our crown – with a small fraction of the world population, but managing just under 10% of all assets saved, anywhere in the world, this industry represents the dominance of our investing model as well as our ability to attract and retain human capital.
The challenge for any incoming government is to protect both of these crucial components – this means appropriate and proportionate regulation to protect the ‘model’ and effective tax, employment and immigration policies to encourage the skills cluster in the UK.
This challenge is clear enough, but you also have to combine it with defending our industry from European regulation, which sometimes seems to be directed at reducing London as a financial centre and our model as the predominant choice for investing.
Our industry is vulnerable to the astonishing mobility of capital, both human and financial.
As we see with the speed of fund flows in and out of markets – hubs of fund management activity can easily suffer the same fate, taking years to recover. So let’s run through the issues:
Employment, legal and tax issues are problems for all businesses, but fund management firms, especially boutiques, tend to be quite small in terms of headcount, so broad employment issues are not significant.
The key bugbear is our immigration laws, which all political parties have been trying to outdo each other on, in terms of making our lives as employers of international talent as difficult as possible.
For an emerging markets firm like my own, it has become increasingly difficult to hire, even for a short time, citizens to work with us from the non EU markets in which we invest. It will require political courage, but we would advocate a brave review of the law to enable our firms to have hiring flexibility – with all the cultural, economic and brand benefits this brings to the UK and our sector.
The legal and tax issues have also made life more difficult for firms wanting to run old fashioned partnership structures or engage in high degrees of employee ownership.
The assumption that all LLPs are some sort of tax dodge has resulted in HMRC making life very difficult for firms which operate a broad or junior stakeholder base.
This makes it all the harder for me to bring in newer, younger team members into the partnership, thus reducing our ability to effectively control group risk, retain talent and expand the culture of alignment that I think is so important in asset management.
To focus on the differences between the parties, Labour advocate a re-introduction of the schedule 19 levy on the sale of OEICs and other mutual funds. This would be a mistake.
The UK is far behind other EU fund centres such as Dublin precisely because of this peculiar tax that charges a fund when people sell their units. This industry (fund on-shoring) should be as big as asset management in the UK, so any tinkering to the rules could be disadvantageous.
The Conservatives on the other hand have worked quite hard to help the asset management industry in battles with Europe; they did remove schedule 19 in 2013 and have made efforts to push the FCA to focus on the ‘competition’ element of their charter. That is all to the good, but there is much more work to be done here.
The biggest threat
However, by far the greatest threat to our industry, the great elephant squashing the fertile grasses of our boutique industry, is regulation both at home and abroad.
Society has decided that the best way to reduce risk is through rules – boxes to be checked, but at the New City Initiative (a think tank founded by boutique fund management firms to promote ‘proportionate regulation’), we believe that the right structure and culture is far more important in encouraging good behaviour and better client outcomes.
Regulation is vital for effective markets – but new initiatives such as Mifid and Aifmd, in our view, severely impact the ability of small firms to start up, thereby reducing competition, making the big bigger, the market riskier and ultimately – yes - reducing performance for a return-desperate, ageing population.
This is about more than just trying to bash financiers
An incoming government needs to step in to defend our industry from any further attempts to over regulate our industry from Europe: to boost the resources at the FCA to enable both better handholding of smaller start ups, as well as a wholesale review of the regulatory system to encourage competition and a change in culture – rather than simply writing new rules.
This will be politically difficult, since we feel safe with regulations and no regulator wants to be the one who presided over a catastrophe – but the one thing we know is that rules alone don’t work and the asset management sector, if properly structured (i.e. with a plethora of smaller competing firms), presents very little risk to the financial system.
The government will also need to address how it regulates investment advice.
What worries us is the trend that ‘advice’ is now largely banned. You can give assets to be managed in a constrained way (endless paper-work around suitability), but you can’t get advice – at a time when pensions are being liberated (a good thing), a dwindling number of people are now available to advise you on what to do with them (a bad thing).
Note – selling products is not the same as advice and even the government helplines only ‘tell you what is available’ rather than try to really understand your situation and what you should do. Imagine if we ran our health service like this…
This returns us to the concept of better structures which align financial services firms with their clients, making for a better culture where clients are seen as long term investments and as such, trusted advice can be given.
This does not reduce risks totally by any means, but at least people will be properly aware of them, rather than having the fake comfort of a 100 page disclaimer, and their relationships with their advisers will probably generate far better outcomes too.
Why is all the above so difficult?
Because it means tearing up great quantities of regulations around suitability, how fund management firms are managed, who can be sold what and how, and what we need to record for the central regulators. It means basically doing only very limited things and the one thing all parties agree on is that ‘they must all do a great deal if elected’.
Maybe we should vote for the party who will do the least? Let capital be allocated properly, focus on the intangibles of structure and culture above regulation and the asset management industry will continue to flourish; seek refuge in more rules and more reporting and our sector will decline, and with it our human capital dominance and ultimately the way we can spend our retirement.
This is quite a challenge for any incoming government and whoever wins, the NCI looks forward to helping promote our ‘cultural revolution’ in financial services long after the polls close!