Building better bridges: a world-leading investment industry around outcomes customers need

Speaker: Charles Randell, Chair
Event: Investment Association Annual Dinner, Mansion House
Delivered: 10 October 2019
Note: this is the speech as drafted and may differ from the delivered version

Highlights:

• Let’s secure the UK investment industry’s world-leading position by focusing on the outcomes customers need.
• An investment industry which provides fair returns to its customers - the providers of capital.
• Allocating customers’ money to businesses which can best add sustainable long-term value.
• With innovation and fierce competition which benefit large investors, small investors, and the whole of society.

We’ve begun to debate the future of regulation at the FCA, taking stock of the system we currently have and considering the different options which may be available in the future, and I know you all have strong views on this. So it’s good to be here.

Tonight I’m going to talk about bridges.

Later this evening I’ll be going home over Southwark Bridge, just behind us, which opened for traffic nearly 100 years ago. It replaced a previous bridge which opened just over a hundred years before that, in 1819. Back in those days, bridges were fiercely competitive. Southwark Bridge charged you a toll to drive your horse and cart over it – customers would pay a bit more, so the theory went, to escape rush-hour on the toll-free London and Blackfriars Bridges on either side.

Unfortunately, it didn’t work. People had a keen eye for good value, and they voted with their – and their horses’ – feet. In 1864 the Bridge had to be bought out of bankruptcy by the investment fund that happened to own the other 2 competing bridges.

What kind of fund was this? A vulture fund? A distressed assets specialist? A high-yield bond fund?

No. It was perhaps the oldest patient capital fund in the world: the Bridge House Estates. Its governing body is the City of London Corporation.

This fund has been going ever since 1292, carefully investing the taxes, tolls, and fines levied on the old London Bridge in a portfolio of long-term assets, to maintain and replace that bridge twice, and build and maintain the other 4 bridges that connect the City of London to the south of the river. Most recently, the Millennium Bridge.

Over 700 years – that’s pretty patient capital.

Allocating capital sustainably

Your time horizons might not quite be that long. But allocating customers’ money wisely to investments that can add sustainable long-term value like this is one of the biggest expectations on today’s investment industry. Investments that are sustainable for the economy. Sustainable for the environment. Sustainable for society.

And we agree that it’s important for savers to have access to longer-term asset classes. That’s why we’re working with the government on the patient capital review[1], we’re consulting on opening up the permitted links regime[2] to enable longer term investments through defined contribution pension funds, and we’re listening carefully to the Investment Association’s suggestions on the Long Term Asset Fund.

But the illiquidity and concentration risk in private markets need to be managed well. As the property fund episode in 2016 and Woodford Equity Income Fund’s recent experience have shown, it’s a challenge to ensure that retail investors have a safe way of participating in these opportunities and the right information and expectations about liquidity.

That’s why we’re tightening how liquidity is managed and how it’s disclosed[3] for non-UCITS funds that invest in inherently illiquid assets. And why we’re undertaking a joint review with the Bank of England[4] to examine these issues further for all open-ended funds.

Part of the challenge with private markets is that we’re living in an era when privately-held businesses may be a big part of a new industrial revolution. But some of them attract extreme valuations when there’s no sign of profitability. Tonight is a good opportunity to recognise the investment industry’s role in reining in some of the valuation and governance excesses. 

Thanks to active managers who respect high standards of corporate governance. Who want companies to be sustainable for the long term. Who balance the urge for growth at any cost with the experience of centuries of investing more responsibly.

This is stewardship in action.

Fair returns to the providers of capital

Now, the funds that you run are all bridges. Bridges from people’s savings to businesses that can add sustainable value. Bridges from a hard working life to a happy retirement. Bridges from today’s savers to opportunities for future generations.

So it’s important they provide the most efficient, best run and best value way for the customer to get from one side to the other. And it’s no secret that at the moment we think that you could be making it a lot easier for your customers to achieve their goals.

I’m sure you’ll remember the Asset Management Market Study[5] findings in 2017. High levels of asset manager profitability. Weak price competition – particularly for active retail funds. Actively managed funds clustered at the same price points for the last 10 years.

Customers – the providers of capital to your funds – need a fair return. In the Asset Management Market Study we found, as a general rule, that the higher the charge, the lower the return. We want the UK to be the best place in the world to be an investor, but Morningstar[6] rates the UK below a number of our global competitors for fund fee structures, and the European Securities and Markets Authority (ESMA) has found[7] that Swedish and Dutch savers consistently pay less than British ones.

Using the old Southwark Bridge literally took a toll on your wealth. And high fees take a heavy toll on the retirement outcomes of millions of people. But improvements in costs and charges disclosure – vital as they are – aren’t enough to help fund customers find the best value on their own. It’s just too complicated, and they are at such an information disadvantage compared to you.

That’s why we’ve stepped in to strengthen fund governance with independent directors and requiring annual assessments of fund value. I’m looking forward to seeing these measures make UK authorised funds the best value they can be.

But these measures don’t cover the £1 trillion of assets in unit-linked funds, where most people’s pensions are. And we’ve recently found the same weak governance and limited consideration of unit-holders’ interests[8] when it comes to value, fees and charges that we saw in the market study. So we will have to think further about our response to these weaknesses.

Meanwhile we’re also extending the Senior Managers’ Regime[9] to make you all accountable for what your firms deliver. I urge you to embrace this and the focus it brings on responsibilities, resilience and results, as the banking industry has done.

Innovation and competitiveness

Let’s not forget that the investment industry is one of the jewels in Britain’s economic crown. Over £9 trillion of assets under management, making the UK the second largest investment management location in the world after the US.

But no one wants to be in second place!

And innovation is the key. This industry has huge potential to improve the lives of its customers through innovation.

Investment Association members are already innovating to stay ahead to cement the sector’s future global competitiveness. Through exciting FinTech projects which engage investors better and drive down costs. New strategies and asset classes to meet the growing demand across the world for responsible and sustainable investment. Low cost highly diversified products that work for you on the way to your target retirement date.

Which seems like a good moment for me to pay tribute to the late Jack Bogle of Vanguard, who died earlier this year. He saw the journey that his customers needed to make, and built a brand new type of bridge to get them to their destination cheaply. Innovation in the interests of consumers that should inspire the whole industry to keep innovating.

The FCA wants an innovative and competitive sector because the market is a global one. A successful UK sector can bring more intensive competition for the benefit of consumers and a range of new products that will meet their changing needs. That’s why we support innovation through Project Innovate[10] and the Sandbox[11] , why we are providing a dedicated authorisations service for asset management firms[12], and why we have opened the market to funds from Hong Kong through mutual recognition[13].

But more generally, an effective and forward-looking system of regulation is a competitive advantage to the UK investment industry. That requires us to focus on the outcomes the industry achieves for the households, businesses and governments which are its ultimate customers. That also requires us to look hard at our regulation to ensure that it doesn’t get in the way of those outcomes. 

But it must never involve putting the interests of the sector ahead of the people it’s here to serve. That sort of behaviour never ends well.

Conclusion

So let’s work together to build a truly world-leading investment industry around the outcomes customers need.

An industry which provides fair returns to the providers of capital.

An industry that’s as good as it can be in allocating customers’ money to businesses which can best add sustainable long-term value.

An industry that is innovative and fiercely competitive, so that its benefits accrue to large investors, small investors, and the whole of society.

Let’s work together to build better bridges.