Newsroom & speeches
09 November 2009
Launch of the Asset Management Working Group report
Check against delivery
The Chancellor invited the Asset Management Working Group to consider what needs to be done to ensure that the UK remains a premier location for asset managers. He asked the Group to think creatively about development opportunities for the sector and to help shape the UK’s strategy for engaging with international colleagues on asset management.
On behalf of the Chancellor, I am grateful to Bob Jenkins and all of the Group’s members for pursuing these issues with energy and enthusiasm.
Under Bob’s stewardship, the Group has highlighted the strengths of the UK asset management industry and made a valuable contribution to securing its future success. The report draws on the collective experiences of all members. I would like to thank all of you for your time and dedication.
I spent a number of years in asset management; it is an industry I think I understand something about. And, as with all things you understand, I see great strengths in the UK industry, but I also see challenges ahead.
The UK is a global leader in asset management; the industry employs tens of thousands of people and serves millions of customers worldwide who trust the industry to manage their savings with wisdom and skill. We have a vibrant and dynamic industry, with world-class expertise.
This is no accident: success has, and must continue to be, nurtured. The industry benefits from tax certainty, transparent regulation on established legal context and a skilled workforce. For many years, industry and Government have worked in partnership to create a better collective understanding of asset management and to seek to overcome barriers to success. The report recognises that there is more that can be done; and to do this, we must maintain open dialogue and debate.
I welcome the prospect of on-going engagement with the industry on a broad spectrum of issues from the narrow, tax and regulation, to the broad, the role of markets in society and ethical and moral dimensions to investment.
The report also recognises that the UK asset management industry does not operate in isolation. It is an important industry that impacts on multiple aspects of the economy and society. It has previously not achieved the recognition it deserves as an important business sector, seeming to be hidden under insurance and banking. Bob and his team have done an excellent job in raising awareness.
Let me say a little about the EU’s Alternative Investment Fund Managers’ draft Directive. Unlike some European countries, the UK has regulated alternative fund managers for many years. Our regime is stringent and robust, but it has not impeded the growth of the UK industry. Indeed, the UK hedge fund industry gained market share from the US despite tougher regulation here. I believe this was in the past because clients were drawn to a jurisdiction with good and sensible regulation.
The key here is balance. The Alternative Investment Fund Managers’ Directive is very important for the future of financial services in the EU. Bob’s report importantly recognises the Directive as an opportunity for the UK to develop a viable onshore hedge fund regime – I regard this as a real and significant opportunity for the industry to grasp.
As many will know, I have taken a close personal interest in the Directive’s development. This Directive needs to promote economic recovery – not stifle it – and needs to contribute to a responsible and strong financial services sector in the EU. The Directive, as currently worded, falls short of these expectations.
The recent ECB opinion on the Directive mirrors the views I have been expressing for many months, and strengthens the Government’s position on the deficiencies of the Directive.
I am working closely with European counterparts to deliver a proportionate Directive. I have travelled to Brussels, and elsewhere in Europe, to discuss the Directive with many of the key stakeholders, including MEPs, the Swedish Presidency and my Spanish counterpart in Madrid, and in the coming weeks, with the Polish Finance Minister in Warsaw. I believe we are making very real progress towards achieving significant improvement in the Directive.
But, as with many of the topics covered in the Asset Management Working Group’s Report, this work is not for Government alone. It is important that all stakeholders get involved in this process if we are to ensure the right result for Europe. I urge the industry and its clients to play its part in making representations in Brussels and to Member States.
As we work to strengthen supervision and regulation, it is important that we also strengthen corporate governance and shareholder stewardship. Regulation will not, in and of itself, successfully address the pursuit of ‘money’ – which Sophocles notes ‘warps and seduces native innocence and breeds a habit of dishonesty’ – at the expense of the creation of value.
The incumbent governance framework allowed priorities in some banks to be skewed in favour of the short-term interests of a select handful of employees (traders, investment bankers and very senior management), and away from the long-term interests of capital providers. Boards failed to safeguard their institutions, and fund managers, in aggregate, failed to protect the interests of their clients, pension funds and others.
Governments can and must help strengthen governance and stewardship.
Sir David Walker is due to report on governance later this month, and, in line with his interim report, will make recommendations for far-reaching changes in a number of areas: board composition, risk management, remuneration and shareholder engagement.
But this industry needs to play a leading role in seeking reform.
Fund managers in most cases act as agents for clients, the ultimate owners of companies. As the agents of owners, the asset management industry is critically placed to ensure that companies in which they invest their clients’ money deliver long-term, sustainable returns. Not all fund managers offer ‘governance’ as part of their bundled package, but it is clearly incumbent on pension fund trustees and others in similar positions to ensure that someone is taking this role seriously on their behalf – and doing it well. The onus here should clearly be on the ultimate owner – the investment trust, insurer or pension fund. If the owner’s interests are not represented through effective stewardship, we cannot be surprised if agents substitute their own goals.
As Ruskin said “Quality is never an accident; it is always the result of high intention, sincere effort, intelligent direction and skilful execution”; good governance takes commitment, time and effort. Good governance and stewardship is going to require new and higher standards and, importantly, strengthened and independent oversight. It is going to require end owners to change their behaviours – they need to become better skilled and more challenging about their fund management arrangements, as well as about fund manager resources and performance.
Let me say a little about market efficiency; an assumption that gathered strength in the last 20 years and underpinned many investment strategies and approaches to regulation. The experience of the last two or three years requires us to re-evaluate our assumptions about market efficiency; assumptions that may have contributed to volatility and extremes of valuation, exaggerated as they were by the absence of significant contrarian views and voices, subservient to the dominance of ‘momentum’ as a style, a plausible, but profoundly suspect response to excessive emphasis on short-term performance.
In the past, we prioritised freedom of markets and liquidity over strong ownership, good governance and long-term value creation. The belief that markets are efficient and capable of self-correction, and provide incentives to check poor strategies and management, has not stood up well against the experience of the last two years. The assumption that the market will drive good outcomes and that liquidity must be facilitated at all costs may have contributed to the emergence of the ‘ownerless corporation’ and high-frequency trading practices, which add little economic value, are almost wholly detached from the concept of economic ownership and possibly pregnant with regulatory questions. This has to change, and the asset management sector has the intellectual capacity to lead debate towards change – pressing for a greater focus on the long-term and challenging practices of questionable utility. Indeed the fund management industry, which largely relies on markets and distributed ownership, needs to strive to prove the worth of this model and headoff concerns that the current diversified portfolio share ownership model has elevated trading liquidity to a point where it runs counter to the pursuit of long-term value and accountable companies and boards.
One issue that needs to be addressed is the link between remuneration and long-term performance.
The headlines have focused on the action that Governments and regulators are taking in respect of remuneration. We have taken action both nationally and internationally to ensure banking remuneration does not incentivise excessive or poorly managed risk taking. Major banks in the UK will implement G20 principles in respect of 2009 bonuses, including deferral and clawback.
But remuneration is first and foremost a matter of corporate governance and shareholder stewardship; it should not be the job of Government – it is the clear and undeniable responsibility of owners.
If fund managers show no wish to act in the way economic theory tells us we should expect owners to do then we will have to ask whether core assumptions that underpin the unitary board and the Combined Code accord with reality. The concept, for instance, of ‘comply or explain’ clearly assumes investors acting as informed owners, engaging with the unitary board; not an assumption that sits entirely comfortably with the behaviours of many fund managers that has enabled the emergence of the ‘ownerless corporation’. This is a significant issue for Sir David Walker to address – have we assumed more from fund managers than they are in practice willing and able to deliver? If so, how do we address this governance deficit? To whom should the unitary board account if shareholders are not willing to fulfil the role?
I believe the answer lies with clients of fund managers taking a much greater interest in the care exercised over the management of assets bought and held on their behalf by their fund managers. Government can facilitate the right framework and make clear the legal basis for fiduciary responsibility, but the principle drivers for change must be the ultimate owners. They must insist on at least some of their portfolio managers taking a serious responsibility for governance - and they must recognise that this will require skills beyond those of management on styles that focus on trading and/or eschew a governance responsibility (and skills that needs to be appropriately incentivised and compensated).
And to reiterate my thanks, I salute Bob and his team for what I think is an extremely good paper. It sets an admirable direction of travel and I think will be a valuable benchmark for progress in the years to come.
Ends
