The UK Investment Association published a ‘statement of principles’ back in April with the overall aim of encouraging its member investment management firms to commit to placing “client interests ahead of their own”.
As of the beginning of August, out of 200 member firms a grand total of 25 firms had actually signed the statement.
While this may seem a low number of roughly 13 per cent of the IA’s members, in terms of assets under management it represents a slightly higher number of just over a third of the member total (£1,800bn out of £5,000bn).
Within the document itself, the principles may appear to the bystander as stating the obvious, i.e. “so what have they been doing with my money up until now?”
However, below we explain how a fund provider’s ethics are very relevant to the investor client and why any behaviour that goes in the right direction should be commended.
How did we get to this?
The financial crisis of 2008 and subsequent years may seem like a period when a lot of scandals have occurred and the reputation of the investment sector tarnished.
However, the seeds for this had been dealt in the years before.
To give a brief overview, within the last 15 years we have seen:
• the tech bubble – influence of investment banking revenues to bias research analyst recommendations;
• Enron/Worldcom collapses – improper and fraudulent accounting and audits due to the influence of client audit revenues;
• real estate bubble plus 2008 crisis – a whole host of issues, including lack of oversight/regulation, agency bias of traders, illiquidity and over ambitious credit ratings of structured products;
• government bailouts of banks who had over exposed themselves to illiquid credit;
• Libor plus FX price fixing;
• tax evasion and money laundering practices of multinational banks, along with unfavourable treatment of whistleblowers (see Bradley Birkenfeld, Paul Moore, Everett Stern); and
• introduction of the Retail Distribution Review in response to client’s paying hidden charges and their interests not being represented, e.g. orphan clients.
Overarching these events was a belief by regulators that the market could take care of itself.
For example, by repealing the Glass-Steagall Act of 1933, US regulators allowed the merging of banks into ‘too big to fail’ entities and the creation of overly creative financial structures.
There was an assumption that, in the long-term, market participants have a self interest in preserving their own existence and were hence the best allocators of risk.
The UK followed a similar path with the Financial Services Authority generally following a principle of ‘light-touch’ regulation and market players observing self-regulation.
