We have the SMCR coming along in less than 3 months’ time. Are you ready? Is anyone ready? I’m not that convinced anyone really is.
The banks have already been through it but now it’s the time of the asset management industry and, judging by the nonchalance shown, I am not too certain many senior managers have realised the changes and expectations of the regulator which is just around the corner.
At a recent conference, Lord Myners, (incidentally my first boss back in the 80’s), welcomed the forthcoming introduction of the SMCR. Notably, he commented it was like a return to the days when many investment houses were partnerships and the partners took the liability of the business and, thus the responsibility if things went wrong. Today, accountability is moving away from the franchise holder approach of recent years, to senior managers and the collective responsibility has moved to personal responsibility. A positive approach says Myners.
The tone of the business comes from above and sets the whole agenda as far as ethics and the approach to governance. It is true you can judge a company from the top and, if a senior manager has disdain for internal controls then you can bet your bottom dollar the whole business will reflect that. Examples have littered the industry over the year’s and, you could say if the SMCR had been in before the financial crisis, the wrong doings at RBSmight well have been avoided! A weak chairman not controlling their CEO- a recipe for disaster if ever there was one!
With the advent of the SMCR we have the opportunity in the asset management industry to change things for the better, especially where risk has been exposed in recent months with Mr Woodford et al. I would advocate if businesses struggle to implement the SMCR then they shouldn’t be in this game. It should be proportionate whilst being flexible but most importantly, at all times accountable. We need to avoid the box ticking exercise that many firms seem to think that all this new governance. It is all about culture. What is endemic in your business should be for the greater good and ultimately investors. But we do have a dilemma potentially between directors and shareholders of public businesses. Will shareholders give managers enough scope to implement SMCR, even if it means the returns to shareholders fall? It could be a serious conflict, meaning businesses may lose senior management getting voted off the boards by the shareholders for failing in their shareholder value for delivering strong corporate governance and accountability.
The SMCR is one further step to restoring the public’s faith in the asset management industry, although I would argue we have a long way to go. One aspect that is yet to be fully addressed is the significant conflict between the benefits to the investors and that of the managers of the business. Just as Turkeys tend not to vote for Christmas, there are many situations that arise in the running of an asset management business when there comes a time a senior executive has to make a decision that has the potential to go against their personal situation and, rather in favour of the investor.
Here is an example. A board is aware the is a cheaper option in the running of their fund that being with a different provider. However the consequence is a need to change the board and thus, they would lose their position. Tough call eh? . What a dilemma and one I know exists and has existed before. So, how do we get around that and restore the confidence in the industry and avoid the “Self-Preservation Society” culture that seems to pervade everywhere.
At a meeting earlier this month, I met Matthew Priestley, a very experienced individual who has years of working in the area of fund governance. We were discussing the various changes in the fund management industry over the years and yet, the same mistakes were being made, time after time, just like a scene out of Groundhog Day! The topic of oversight was clearly part of our conversation in light of the various articles that have appeared on social media platforms and in the pages of the trade press, as well as some national papers. What we found amazing is despite the noise over Woodford, there has been no noticeable movement to change the status of many managers when it comes to how they see oversight. To many, the idea of evidence-based oversight is an anathema and they would rather ‘tick a box’ than actually spend time demonstrating they are on top of the situation with regards the risk aspects of their business.
Now I am not suggesting all fund managers deliberately ignore regulatory controls but, more that the regulation is often so vague and unclear that many managers don’t realise that by just saying “yes’ to questions on oversight isn’t enough. You have to demonstrate you actually know what is going on within your fund and you have a clearly documented oversight process, not only giving comfort to the regulator but just as important, to investors.
The regulator has been remiss on many things over the years. It has spent far too long down amongst the weeds dealing with the minutia of the industry rather than addressing the key endemic and systemic problems we have. Some would argue that some of the rules that have been imposed by the FCA are not actually understood by the regulator itself! The average age and experiences are woefully low amongst all regulators. Lots of people but not enough substance!
In recent weeks we have seen many fund buyers, particularly in the wealth management space, request full liquidity reports from fund managers. Some managers have responded quickly and accurately but not all have the ability to do so and have resorted to stress scenarios that, in reality may not be fit for purpose. I would challenge many managers to stand up to scrutiny when it comes to fully knowing what the position their portfolio would be in the event of perfect storm scenario. The problem is many just do not want to have to do it plus the independence of the report could be challenged. We need to see a raft of independent risk managers looking at the industry so as to allow managers to focus on what they do best. Some would argue fund managers should be monitoring risks at all levels however, in this day of challenging regulators and more savvy investors and advisers, there most definitely is an obligation for managers to articulate risk at all levels within their portfolios.
So, let us embrace the SMCR and be open to scrutiny with an approach that encourages independent thinking and never forgetting whose money it is……the investors.
Have a great and sunny weekend!