The Government faces four particular challenges in its regulation and promotion of the UK asset management industry.
- It has much to lose and little to gain from change – Britain is Europe’s largest asset management hub and the disruption of the pandemic and Brexit are seen as more of a threat than opportunity.
- Traditional asset management is being replaced by new processes, products and people. Britain will have to work hard to stand still , let alone prosper.
- The new normal of low yields means that margins will shrink as value for money comes under greater scrutiny and disclosure more transparent.
- The asset management industry is being press-ganged into delivering social purpose products, particularly in the areas of climate change and building Britain back, post pandemic
Recognizing these threats to existing hegemony, the Treasury has responded with a call for input from the finance industry entitled the Review of the UK Funds Regime
Much in this review is specialist to those who work in the production and administration of funds, whether mutual, ETFs or the myriad of acronyms that define the various wholesale and retail vehicles that fall in and outside the FCA’s regulatory perimeter.
Many will shudder to discover a part of the review devoted to expanding “unauthorized funds” for professional use only. The recent announcements of increases in the FSCS levy serve as a warning of how easy criminals can hi-jack professional funds for retail purposes. Many consumerists will read sections of the review and feel their worst fears of post Brexit de-regulation are being realised.
But I think this would be wrong. The 38 questions with which the review ends are genuinely open ended and focus on ways to counter the threat to the funds industry of the various market changes mentioned above.
Relevance to UK pensions
The paper has some important questions for the funds industry about pensions.
It refers to the DWP’s consultation on DC scheme consolidation and the need to furnish large DC schemes with vehicles that can invest in illiquids without the problems that have plagued DC funds of late. I have written about these recently. Proposals for LATFs which allow DC funds to hold illiquid assets are supposed to be addressing these problems though I can’t see what specifically LATFs do that can’t be done using the relaxations in permitted links last year.
The paper also looks at the burgeoning drawdown market and asks if new structures can be created to help people take flexible payments from their fund without losing sight of the need for a wage for life pension.
And the paper recognizes the work of the DWP in introducing TCDF disclosures , encouraging fund managers to manage assets with an eye to reducing their carbon footprint.
These very specific measures, tie in with the FCA and TPR agendas. Indeed the change in pension saving from DB to DC is now at a critical stage as more money in DC is owned by those over 55 – looking to spend in as well as save for retirement. The bifurcation between retail drawdown and collective scheme pensions is likely to become more pronounced if master trusts move towards CDC while GPPs offer investment pathways.
The review recognizes the internal demand for funds that deliver income and there are interesting comments on how funds might distribute both natural yield and return of capital including mention of the target dated approach of bond-ladders.
The wider picture
But the Treasury has clearly got its eyes set on wider markets than those internally in the UK. The review recognises, for instance, that ETF funds have not domiciled in the UK and are unlikely to domicile here in the future. Instead of competing for domicility, the review suggests that Britain could become a center for ETF hubs, where new ETFs might be set up by the City and administration of existing ETFs could be spread out by expanding existing fund administration centers in Scotland, Greater Manchester, Wiltshire and Dorset.
And much of the paper focuses on tax and regulation, suggesting that in return for maintaining or even increasing existing market share, Britain could offer overseas markets access to lighter touch regulation and lower taxes on funds. This sounds a distinctly tricky proposition for Europe to accept and no doubt the review is being thumbed through in Brussels as I type.
Overall, this is a timely review that shows that the Treasury are not paralyzed by change but seeking to adapt to it. It shows that the Government’s priorities are very much with maintaining the pre-eminence of our funds industry abroad but within it, there is some recognition of the needs of the UK pensions sector.
I for one would feel more comfortable with the Treasury’s motives, if I saw it combined with reform of the pension taxation system, which is currently biased towards wealth and against the needs of those who don’t have wealth. Reform is needed of how tax-relief is granted and that can start this budget by a determination to adopt NPAG’s P800 solution to the net pay scandal.
The wider picture includes the way in which fund management impacts on those who have only recently been financially included. The Treasury has a duty not just to the funds industry but to those who depend on it.