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Ep 3: An early Christmas present
304 Plays1 year ago
Last week, the FCA published its landmark report on asset management. The conclusions were damning about the sorry state of competition in the UK investing industry.
In many ways, the findings felt like a vindication for those campaigners who have been highlighting these failings for years.
One of those pushing for change is Andy Agathangelou, Founding Chair of the Transparency Task Force. In this podcast, he speaks to Robin about his ongoing battle for greater transparency in the investing industry, why the FCA is only now just catching up to these problems, the impact beyond the UK, and what he believes is the most important finding to come out of the report.
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Transcript
Introduction to Evidence-Based Investor Podcast
00:00:05
Speaker
Welcome to the latest podcast from the Evidence-Based Investor. I'm Robin Powell. If you are hoping to hear all about last week's inaugural Evidence-Based Investing conference in New York City, well, that was the original plan, but you'll have to wait till next week for that because we've been overtaken by events.
FCA Report on Asset Management
00:00:26
Speaker
Yes, I woke in Boston, Massachusetts last Friday morning to excellent news from home. The Financial Conduct Authority, the UK regulator, has published the long-awaited interim report on its study on competition in the UK asset management industry. And it really is an early Christmas present.
00:00:46
Speaker
It contains, in short, pretty much everything that I and my fellow campaigners for greater transparency in the investing industry have been calling for. It's very hard-hitting, levelling blame at virtually everyone involved, including active fund managers, closet indexers, absolute and target-date fund managers, consultants, governance committees, IFAs and trustees.
00:01:11
Speaker
I'm not going to go into detail. You can read the report via the TEBI website at evidenceinvestor.com. That's evidenceinvestor.com.
Interview with Andy Agathangelou about FCA Report
00:01:21
Speaker
But I am going to talk to Andy Agafangelo, the founding chair of the Transparency Task Force, of which I'm proud to be an official ambassador. Andy has worked harder than anyone at putting the case for greater transparency to the FCA and joins me now on Skype.
00:01:39
Speaker
Andy, what was your reaction when you first read this report? My initial response was a genuine surprise. I was genuinely surprised by how hard hitting it was. I guess it's fair to say that for some time I and many others would have been wondering just how serious a job the FCA would do in looking at the asset management industry.
00:02:05
Speaker
Of course, they've been a year in, in preparing this report. But there's, there's always the possibility that it was going to be some kind of a lip service exercise, you know, appearing to
00:02:19
Speaker
bring about the changes necessary without actually getting to the root causes and some of the fundamental issues. But no, there was none of that at all. Now the FCA has been accused in the past of dragging its feet, of being too light touch in its approach. Why do you think it's decided to get tough with the industry now?
00:02:38
Speaker
That's a really interesting question. Of course, I don't know, but I'd like to say that there is actually a connection between the strength of the FCA's interim report and the general kind of political dynamic we are experiencing right across the world. Everybody talks about Brexit and what's happened in North America and what might be happening in Europe.
00:03:03
Speaker
as some kind of a reaction to the establishment. I think it sort of speaks to the idea that people are fed up. People have had enough. People are now demanding to be treated in a different way. And I think that has played through to the regulatory environment. I think that this all goes back to 2008. 2008 showed that the financial services sector was unable to
00:03:31
Speaker
look after itself and look after the millions of people that it serves. And the level of doubt and suspicion and scrutiny and distrust in the financial services sector since the crash has changed the dynamic quite significantly. I think there's now
00:03:47
Speaker
a general acceptance that the financial services sector has been at least in part to blame for what's been going on economically right around the world.
Impact of Global Politics on FCA's Stance
00:03:57
Speaker
You know, it's contributed to some countries being brought to their knees. Andy, you've got on record as saying that the ousting of Daniel Godfrey as chief executive of the Investment Association, the UK's main fund management trade body, was a watershed moment. Explain that. I think when the IA
00:04:16
Speaker
rejected the pro-consumer initiatives that Daniel had. It must have made the regulator stop and think, what is going on here? Why is it that the trade body for the asset management industry is actually fighting against the idea of putting consumer interests first?
00:04:34
Speaker
I think another very specific event that happened earlier this year contributed to what's happened recently with the FCA. And I'm talking here about the fact that Tom Tugendat, the conservative MP, stood up during Prime Minister's question time and challenged the Prime Minister at the time, David Cameron, about what was going to be done about the opacity around pension costs and charges.
00:04:57
Speaker
I think those two specific events help to reframe the dynamic in the regulatory environment and as a consequence perhaps this has encouraged the FSAA to go for it, to actually do the robust, intelligent, thorough and meaningful job that they clearly have done.
Shift Towards Consumer Protection
00:05:15
Speaker
This report is very wide ranging but for you, what is the most important thing to come out of it?
00:05:22
Speaker
I think the most important finding is that there has been a very deliberate play by the FCA to set out to protect the consumer's interest. There's always been a bit of attention. Do you protect the consumer or do you protect the city? And for many, many years, whenever that sort of either or situation came to the surface, very often, in my personal view, the regulatory regime has tended to protect the city.
00:05:50
Speaker
That seems to have changed. We now have a regulatory proposal that sets out very clearly to help the consumer get the value for money that he or she deserves.
00:06:01
Speaker
when investing into savings, pensions and other such products. So that's the kind of the general shift. Specifically, the idea of an all in charge figure that would embrace all costs really is an ambitious and breakthrough idea. If we can achieve that, then that would be fantastic.
00:06:21
Speaker
because it would mean the consumer would have access to clear, intelligible, meaningful information. Okay, you're listening to Andy Agasangelo talking to me, Robin Powell. There's still plenty to discuss after this short message from our sponsor, Regis Media, connecting advisors with clients.
00:06:40
Speaker
Hi, it's Will. I'm a producer from Regis Media. We know running a financial advisory firm is hard work, but we also know the value of high quality, regular content and marketing. And that's where we come in. We support firms by helping them attract and retain clients through a mixture of video content, social marketing and written articles. To find out more, visit our website RegisMedia.com.
00:07:05
Speaker
Welcome back.
Industry Response to FCA Proposals
00:07:06
Speaker
Andy Agathangelo, as you and I both know, the fund management industry is extremely powerful and it'll no doubt be lobbying very hard against the changes proposed in the FCA's interim report. What do you expect its arguments will be? I think we have to expect that the investment industry as a whole, which is very well resourced, of course very well connected,
00:07:29
Speaker
is going to do what it can to dilute the impact of the interim report. They will do what they can to encourage the FCA to actually not follow through with the proposals that have been clearly set out. I guess they'll do that in various ways. And of course, I don't know what they're going to do. But I guess they would talk about the possibility that jobs in the city are going to be lost as a direct consequence of the proposal set out in the interim report.
00:07:58
Speaker
They will also talk about the possibility of some kind of a brain drain, where the top talent in the investment sector might find themselves tempted to go overseas. They'll probably speak to the idea that given the highly profitable nature of the industry, and therefore how much corporation tax it pays, they'll talk about the fact that this will result in a reduction in the revenue take by HMRC. And I suppose it'll be those sorts of
00:08:27
Speaker
levers that they will pull on to encourage the FCA to look upon their proposals in a manner where they will weigh up, if you like, the pros and the cons of making these changes. So how optimistic are you then that the final report will look not too dissimilar to the interim report? I'm very confident that the final report will be very similar to the interim report.
00:08:52
Speaker
It's not due out until the second quarter of 2017. So we can expect it to be towards the latter end of that second quarter. But what the FCA have done here is what are setting up their proposals. They've also set out the logic behind them. For example, the research that's been conducted by Dr. Anna Tilda.
00:09:12
Speaker
and Professor Michel Badly. That's very meaningful research. That's now out in the open. We can see the basis upon which the FCA has come to their conclusions. So it would be very difficult to pretend that this reality has not now been understood. The FCA talk specifically, for example, about the likely outcomes of using passive investing versus using
00:09:37
Speaker
active investing, they've effectively educated the market, as many others have been doing for years, including yourself, Robin through evidence based investor. So now that the market understands the realities of the investment offerings available, the various advantages and disadvantages in terms of cost charges, like the outcomes, etc, it would be virtually impossible for the FCA to say to everybody, please ignore all that knowledge, insight, and
00:10:06
Speaker
understanding we provided in our internal report. We're going to ignore it and we're now going to do something radically different to our proposal. I just can't see that happening. I think the cap is out of the bag.
Global Influence of UK FCA Report
00:10:16
Speaker
Of course the Transparency Task Force is not just focused on the UK. We also want to promote transparency in financial services overseas. Do you think this report will have an impact beyond the UK? We have to remember that regulation is an international activity.
00:10:33
Speaker
So we can assume that the regulators in North America, in Australia, across Europe will be paying very close attention to what the UK regulators have done here. And it may well be that the countries around the world will be motivated to make similarly brave moves to try to bring their own houses in order as well.
00:10:54
Speaker
You said on Friday Andy that the FCA report shows the UK could become a world leader in financial regulation and that greater transparency could bolster London's status as a global financial centre. Why do you say that? We've only got to really look at what the Prime Minister has been saying in recent weeks about the importance of corporate governance, about the importance of the market behaving responsibly, about the importance of capitalism not getting out of hand.
00:11:23
Speaker
I detect in Theresa May's approach to the market that she's looking for good behavior to be encouraged and bad behavior to be stripped out of the system. I think this is an inherently significant part of the politics that we can expect under Theresa May's leadership. So I think that what the SCA are doing is completely in keeping with that general approach. And of course,
00:11:49
Speaker
in a post-Brexit world, anything that the UK market can do to look attractive to investors is a good thing. And investors like certainty, investors like transparency, investors like knowing that market forces will work. And of course, the FCA's interim report has been pointing out
00:12:09
Speaker
that the market simply has not been working. If they correct this and if the UK's financial services sector becomes known to be a free, open, competitive, transparent, clean market without any shenanigans going on, then that's going to make us a really good place to invest
Conclusion and Transparency Movement Victories
00:12:25
Speaker
into. There's clearly no room for complacency as we discussed earlier. The industry won't take this line down and there's still plenty of persuading to do.
00:12:33
Speaker
But this nevertheless is a big victory, isn't it, for those who've campaigned for transparency for many years? Everybody needs to understand that the Transparency Task Force is young. We only came into existence in May 2015 and there are many people who have been campaigning actively on the agenda of greater transparency in financial services for many, many years. Those that spring to mind immediately are Dr Chris Cyr, who for I think seven or eight years has been battling away
00:13:03
Speaker
often without any recognition or without any support for his passionate view that the consumer should be looked after more effectively. I think that Chris has had a tough time in standing up to the challenging opposition that he has taken on.
00:13:18
Speaker
And boy oh boy, he's made a huge impact in the market. Also Gina Miller and her husband Alan, who are the founders of the True and Fair campaign. Similarly, I think their activity goes back seven, eight, nine years or so. And Gina spoke at our conference a little while ago at one of our transparency symposiums.
00:13:35
Speaker
And it was fantastic just to hear her voice, the sense of determination and the sense of self-belief that this is a battle that can be won and she's been winning it successfully for years. Andy, you're a very modest man, but well done to you as well. And thank you for all your efforts on behalf of the consumer. You must be very pleased. Been a tremendous few days for the movement for pro-consumerism in the UK. Let's build on this momentum together.
00:14:02
Speaker
Let's work out what needs to be changed and let's make it happen. Andy Agathangelou, founding chair of the Transparency Task Force. Thank you for joining us. And that's about it for this week. You've been listening to The Evidence-Based Investor. This podcast is brought to you by Regis Media, connecting advisors with clients. You can find out more at RegisMedia.com. That's RegisMedia.com.
00:14:28
Speaker
Join us again next time when, barring any more major developments, regulatory or otherwise, we will be talking about the first annual Evidence-Based Investing Conference held last week in New York. Suffice it to say for now, it really was great. You're gonna wish you'd been. For now though, goodbye.