Transparency issues have become even more prominent since the controversial departure of Investment Association head Daniel Godfrey. John Greenwood reports
According to the FT’s personal finance editor, Claer Barrett, Daniel Godfrey’s crime was “standing up for the little guy”, while BBC Moneybox presenter Paul Lewis tweeted: “So much for trying to get fund managers to be honest on charges.” The Independent, meanwhile, raged: “Fund managers: Don’t ask us to be transparent over our fees.”
Whatever went on between the Investment Association and its now departed chief executive back in October, one would have to be blind not to see that the asset management community’s reputation has been seriously damaged by this affair.
While Godfrey’s detractors should not be ignored – he is charged with lacking an international perspective, increasing red tape for his own members, acting like just another regulator and, crucially, losing the backing of the people who paid his wages – the manner of his departure has blown a massive hole in the investment management industry’s attempts to polish up its image.
The fact that just 25 firms out of a membership of around 200 had signed Godfrey’s flagship statement of principles that included a requirement to put customers’ interests first shows the extent to which the chief executive’s reforming agenda had become detached from the views of members.
Widening gulf
But the gulf between the investment management community and the stakeholders with which it must interact is widening, not decreasing. A poll at the Corporate Adviser summit in October, days after Godfrey’s exit, found 39 per cent of delegates, all very senior consultants and advisers in the DC industry, were more mistrustful of the fund management industry as a result of his departure. Sixty-one per cent said it had not changed their view while none said it had increased trust levels.
Lane Clark & Peacock partner Andrew Cheseldine says: “It does feel tremendously like the Investment Association has shot itself in the foot and the industry has too.”
The IA itself is currently in a bunker mentality, turning down requests for interviews and declining to comment on questions as to what plans it has to regain the trust it is perceived to have lost.
Rather than silence debate around transparency, Godfrey’s departure seems to have emboldened those calling for change, putting more pressure, not less, on the IA to show it is taking transparency issues seriously.
Pension scheme member activist group Share Action chief executive Katherine Howarth says: “It has to be a problem for the Investment Association that it parted with its chief executive in a hurry at a time when he was seen to be championing changes that looked to put the client first.
“One question is: how is the regulator going to respond? Is it going to say we need some really strong regulations around this now that the industry has shown it is not going to get its own house in order?
“Whether that is likely in the post-Wheatley world is another question, but there is a risk this becomes an own goal for the Investment Association if the regulator decides to look at the conduct issues of those who have refused to sign the statement of principles.
“One senior figure in the investment industry told me the first thing he would do if he was the regulator was have a good look at the conduct approach of the ringleaders of the resistance against Daniel Godfrey.”
However, transparency is not the only issue at play in this dynamic, says Howarth. “There is a big piece of work going on looking at executive pay. Post these events, it feels that it is now incumbent that the process that deals with this does something quite robust. They have got to show that they are taking this issue seriously.
“A critical issue as to whether this will blow over is whether the large clients of investment managers are prepared to ask why they won’t sign the statement of principles. It would be good to see the Pensions and Lifetime Savings Association [PLSA] getting its members to have some discrete debate about what this means and challenging asset managers on this.”
PLSA external affairs director Graham Vidler says: “The IA’s statement of principles is a great initiative, which we support in the debate on value for money in fund management.”
Concern is growing that investment management is a convenient way for providers to sidestep the charge cap on pensions, and the approach taken by independent governance committees and trustee chairman’s statements towards transaction charges will be watched keenly.
Conflicts of interest between vertically integrated pension providers that are both administrators and asset managers are a key issue raised by research by the Pensions Policy Institute in its recent report, Comparison of DC Pension Regulators, which was commissioned by Scottish Widows.
Pete Glancy, Scottish Widows head of corporate pensions proposition, thinks full transparency will make a mockery of the 0.75 per cent charge cap.
“The amount of money coming out of the scheme is going to blow the charge. It makes a nonsense of it,” he says. “It does not smell right that there should be that much money coming out of the system and so much opacity. Advisers’ and life insurers’ charges are transparent but it is not the same for fund management.
“We suspect a lot of money is being taken out of the system. Vertically integrated providers can loss-lead on the product wrapper where the charges are visible and then take profits out from the asset management where the charges are opaque.”
Glancy expects a directional steer from the DWP in its work on transparency before the end of the year, with a response to its consultation coming out in the first quarter of 2016.
Movement for change
Meanwhile, the newly formed Transparency Task Force is running what is effectively a parallel review of these issues – further evidence of the growing momentum of the movement for change. It has several teams scoping areas for consideration by regulators and the industry. Its data team, for example, is working on a potential Data Transparency Statement whereby suppliers warrant that they are providing data to a specified standard. It is also considering a full cost disclosure statement in a standard format to be published in managers’ reports and accounts. And it is looking at the development of a public database to enable the market to develop relevant benchmarks.
Regardless of whether the regulator has the appetite to enforce change, there are also commercial imperatives at play. The UK financial services sector is struggling to come to terms with issues around trust and that is not good for business. As Gurpreet Brar, managing director, UK public affairs at Edelman, the world’s largest PR firm, told TTF delegates at an event in London last month, the financial services sector faces serious challenges in engaging customers as a result of its perceived untrustworthiness.
UK institutions already have an uphill struggle to earn the trust of the British public, who, according to the Edelman Trust Barometer, are among the most distrustful of government, media and NGOs in the world. Worryingly, the UK’s score on Edelman’s barometer fell from 52 per cent in 2014 to 46 per cent in 2015, leaving it 19th out of the 27 countries included in the data when it comes to trust in institutions.
Trust in financial services is even lower, with banks and media the only other sectors having lower scores globally. At a national level, trust in financial services is just 36 per cent, more than a fifth lower than in institutions generally.
Not surprisingly, the key attributes to building trust identified by Edelman’s research include ethical business practices, responsible actions to address issues or crises, and transparent and open business practices. These will all be needed to rebuild the faith of both the corporate adviser community and the general public in this most important industry.