Speaking at the Investment Management Association (IMA) Chairman's Dinner last night, Douglas Ferrans, Chairman of the IMA, called for an independent review into recent investment failures, including Keydata.
He said:
"In the last three years the failure of investment firms has led to a total compensation bill approaching £½ billion (. . .) The scale of recent failures - on a par with the Barlow Clowes scandal in the 1980s - cannot be ignored.
"There is a need for these events to be the subject of an independent review and for lessons to be learned. While we understand that legal and process issues may mean that such a review may not be able to start immediately, it will need to take place in due course and its conclusions must be published. It will then provide valuable lessons for the new Financial Conduct Authority to take on board as it starts its work."
Commenting on the £230 million bill fund managers were presented with, Mr. Ferrans said:
"Probably the biggest event to hit the UK asset management industry over the last year was a bill for more than £230 million from the Financial Services Compensation Scheme.
"The liability was largely the apparent failure of a small structured product provider which had been promoting bonds issued in Luxembourg backed by a life settlement portfolio. This had nothing to do with the fund management industry, but the impact was on us.
On the effect of the FSCS bill on UK competitiveness, Mr. Ferrans said:
"Time and again when firms are asked what they need from the regulatory and business environment the answer comes back ‘stability'. Firms need to be able to plan and to invest with confidence that they will not be derailed by regulator or government-induced events. It is one of the tests by which, in a competitive global market, jurisdictions are judged.
"An unexpected bill for £230 million arriving out of left field comprehensively fails that test. Our regulators and legislators should be in no doubt about the impact that this episode has had not just in the UK but among global investment management firms around the world. Major firms may even now be developing plans as to where to locate their European operations. If there is no reform of the Scheme, this will become a big item in the column headed ‘not the UK.'
Speaking on the reform of the FSCS, Mr. Ferrans said:
"Reform of the Compensation Scheme is a matter of urgency. I urge the FSA and the drafters of the forthcoming legislation on regulatory reform to make this a high priority. The IMA has already submitted detailed ideas to the FSA and we hope for and expect a fruitful dialogue over the coming weeks and months.
Turning to the stewardship of companies in which fund managers invest, Mr. Ferrans said:
"We need to play a proper fiduciary role and this presents a conundrum for us. The conundrum is that stewardship of companies is not something that bears directly on our clients. What our clients want is to see their money professionally, and hopefully profitably, invested. There are those who would say that, sometimes they would prefer their investment manager to be seeking out profitable investment opportunities rather than discussing arcane matters of corporate governance with company boards. I would defend the right of any client or manager to take that view.
"But I do not believe that can ever be the mainstream view. Our clients are ultimately individual consumers, whose long term savings are entrusted to us to manage, whether via pension funds, insurance products or investment funds. And while they may not profess an interest in stewardship when they make their investments, if you were to ask them whether they think companies should be well governed and that shareholders should hold boards to account, the answer would be an overwhelming ‘yes'.
Speaking on the role of intermediaries, Mr. Ferrans said:
"As investment managers we are one set of intermediaries. But our function and our business model are very different. The key distinction is that we act as agents for savers and investors. Customers' assets are held separately from managers' balance sheets and we do not engage in proprietary trading. These are our unique selling points although this agency role is often misunderstood, particularly by those on the periphery of financial markets.
"This means that our interests are very much aligned with our clients' interests and for the most part those interests are exceedingly long term. I know that there are those who argue that the investment management industry is infected with chronic short-termism. But much of the analysis underpinning those claims is flawed. We will be offering our counter-analysis as we respond going forward to the authorities here and in Brussels."
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