Today New City Initiative is comprised of 43 leading independent asset management firms from the UK and the Continent, managing approximately £500 billion and employing several thousand people.
Published by Charles Gubert
With 2020 rapidly approaching, New City Initiative (NCI) takes a look at some of the key issues, which could potentially impact its members over the course of the next 12 months.
Liquidity risk will not be overlooked in 2020
Few would dispute the entire Woodford episode has sullied the reputation of the UK Financial Conduct Authority (FCA). Not only has this whole incident cast a shadow over the FCA, but it is likely to prompt the regulator into adopting a firmer line on the asset management industry. It is very probable the FCA (and other regulators) will now take a much closer look at fund liquidity terms along with the treatment of underlying investors.
In fact, the FCA has already confirmed plans to introduce rule changes from September 2020 for non-UCITS retail schemes (NURS), under which they will now be obliged to provide investors with clear information about liquidity risks and the circumstances in which client access to funds might be restricted. The proposals also insist entities investing in inherently illiquid assets (e.g. commercial real estate) have plans in place to manage the liquidity risk.
The open-ended UCITS question
There is also widening speculation about whether the FCA will decide to prescribe tougher liquidity requirements for open end funds such as UCITS. For instance, it could be the case that regulators permit only but the most liquid of strategies to offer daily redemptions to clients. Elsewhere, some industry professionals have advocated limiting the ability of UCITS to offer daily dealing funds, instead shifting the asset class towards monthly or quarterly liquidity cycles, in what could potentially help fund managers deliver more patient capital.
Potential changes to the depositary rules
Furthermore, regulators may look to sharpen some of the rules around depositaries, entities – which under UCITS V and AIFMD (Alternative Investment Fund Managers Directive) – are required to oversee asset managers’ behaviour and corroborate that they are sticking to their investment mandates and compliance obligations. Industry participants generally accept that the specific service provider which oversaw the Woodford fund acted properly, but an overhaul by UK or EU regulators of the current depositary set-up cannot be ruled out.
Treatment of investors
Last month, Janus Henderson was fined almost £1.9 million after it failed to properly notify retail clients that the levels of active management in two of its funds would be reduced despite having alerted institutional investors to the fact. As such, this meant impacted retail clients paid active management fees for a closet tracker product for nearly five years in contrast to the firm’s institutional investors who were ultimately spared of such charges. Not only could this incident lead to more regulatory scrutiny into the treatment of retail investors, but it may spark a renewed interest from the authorities into closet tracker funds.
ESG: More clarity to come in 2020?
Few doubt the asset management industry’s enthusiasm for ESG (environment, social, governance) investing, but its approach towards it has certainly been muddled, not helped by confusing signals emanating from different interest groups and regulators. The EU has pledged to usher in some certainty through the roll-out of a taxonomy, in what should help investors benchmark their ESG practices. In addition, ESG reporting requirements are also likely to be introduced in order to minimise greenwashing in the asset management sector.
Shareholder Rights Directive 2
As of September 2020, the Shareholder Rights Directive 2 (SRD2) will become law in what is likely to have a major impact on EU asset managers and their investors (along with proxy advisers and intermediary providers). The rules are designed to promote greater shareholder engagement by institutional investors. As part of these provisions, managers will need to disclose to their clients information about their shareholder engagement processes and describe clearly how they are integrated into their investment strategies.