At the outset of 2020, I suggested that it would be a year defined by clarity and precision. How wrong I was! No one could have reasonably anticipated the onset of the global COVID-19 pandemic and the impact it’s had to all areas of life across the globe. With that said, while COVID-19 has been central to all, due to its resilience- global asset management continued to evolve this year including in the policy and regulation space. Here, we’ll look at some of the biggest shifts we have seen in 2020:
10. Financial Inclusion
It is increasingly obvious that the global asset management industry is a more and more
cut-throat, competitive environment resulting in a fee war leaving managers with no choice but to axe fees to attract new investors or retain existing clients. However, another path to the continued vibrancy of asset management would be to “Grow the Pie”. If global participation rates increased, this would mean more customers with different views, profiles, and appetites, meaning more choice for both the supply and demand side. Financial inclusion is an area that policymakers are also interested in. In Europe, the Capital Markets Union revamp is underpinned by a deep desire to have more EU citizens actively investing with ELTIF and PEPP at the center. Studies show that EU retail investors are very much under invested when compared to the US for example.
The US has a better investment culture but has also moved to open the range of investment opportunities available to retail through its accredited investor revisions. The revisions allow US retail investors easier access to illiquid investment such as private equity funds. Across the globe, policymakers want to increase demand through financial literacy education and increase supply using technology and distribution barriers.
We are also seeing a trend towards the democratization of illiquid funds globally with appetite growing among pension investors, wealth managers, and mass affluent distribution channels for higher yielding products with longer investment horizons.
9. Irish Investment Limited Partnership
The Irish Investment Limited Partnership (ILP) legislation remains unfinished at the time of writing, however it’s very close. It’s a significant development as it fills in a gap in the Irish funds’ toolkit at a time when private funds are experiencing increasingly high degrees of investor demand. It is evident that there is a lot of activity in the private equity and debt space with much of that deal flow currently utilizing Luxembourg RAIFs or Cayman vehicles to deploy capital. Therefore, the timing is perfect for Ireland to join the private fund party.
8. Greater Bay Area Wealth Management Connect
While certain events such as an unprecedented global pandemic have slowed down some China developments a little in 2020, the emerging Greater Bay Area (GBA) Wealth Management Connect program has many people very excited, and with good reason. It has a readymade mass affluent audience waiting with significant appetite for investment funds. The demographics and affluence of the GBA area includes Hong Kong, Macau, and Guangdong Province. The fact that UCITS as master feeders or fund of funds play a role here make it very compelling for global asset managers.
7. Value for Money
While the FCA have led the charge on this topic for many years now, other global regulators have taken up the value for money baton in earnest. This has head on impacts to product manufacturers and distributors. In Europe, fund value assessments are coming for UCITS and in the US we expect the SEC’s Regulation Best Interest to continue to drive both product suitability and the cost of investing to the forefront with investors and distributors for the foreseeable future. It is also possible that under the Biden administration, Regulation Best Interest could be revisited after its bumpy ride in 2020.
6. Global Delegation and Outsourcing
COVID has drawn focus on global supply chains and the asset management industry is no different. Global supra national regulator bodies like IOSCO, FSB, EBA, and others have published papers and consultations on the theme in 2020. The AIFMD review in Europe has drawn UCITS into its delegation debate and will be a keen area of focus in the post-Brexit world. In Ireland, within the CP86 debate specific focus, has been drawn to use of global resources for UCITS fund management companies located there and on what functions and activity should reside in Ireland and what may be conducted elsewhere globally. A lot has happened in 2020 but this will remain a key issue in 2021.
5. Digital Assets and Cryptocurrency
So, Crypto gets lots of press attention both good and bad, but in the grand scheme of things it remains quite niche when compared to the total addressable investment universe. It is also largely unregulated, but that could be about to change with actions taken in 2020. What’s has gone a bit under the radar in recent times is that the EU recently released its Regulation on Markets in Crypto Assets (MiCA) and three Democratic members recently proposed the Stable Act in the US Congress. Some commentators have suggested that both proposals will act to stifle innovation and growth of cryptocurrency and digital assets generally, however these are huge foundation stones for creation of scalable regulated markets for crypto, stable coins, central bank digital currency, and digital assets. Often, it takes solid foundations of law and regulation to underpin confidence and institutional participation in market activities. We may now have such policy pillars in place.
4. Fund Liquidity
Despite no widespread significant issues being evident, global regulators seem keen on keeping fund liquidity high on their agendas. It’s a hot button issue still across the global fund universe. Money market funds regulations look like they will be formally revisited in both the US and Europe. While both the US and EU have already moved to home in more on fund liquidity, it appears that supervisory focus will remain intense. Fund liquidity stress testing is something that is here to stay and is making many managers think about the type of fund vehicle they use to deliver certain strategies and asset classes particularly to retail investors.
3. ESG is Everywhere
Lead by the EU, ESG policy making is a very noticeable global trend and it really jumped to near the top of global asset manager agendas throughout 2020. While issues remain, the trend is very obvious. Many feel the new US presidential administration under Joe Biden will see the US align more with the ESG agenda, and that could include revisiting the Department of Labor ESG rule. In practice this rule made ESG investing more difficult for US retail investors; perhaps the ESG pendulum might swing in the other direction in the US in 2021? Either way, ESG appears to be one of the few policy issues that industry generally agrees on.
The many deadlines and headlines made it an exciting year, but Brexit has also disrupted many asset managers business models and created uncertainty where there was once confidence. Brexit is far from finished, so regardless of Deal or No Deal, we will need to continue to factor in Brexit impacts for the foreseeable future. In 2020, many asset managers took action to ensure they could curb certain elements of the UK leaving the EU. Regulators too have moved to smooth the path as best they can, however not all areas have been fully dealt with and Brexit is likely to remain an area of focus past the end of the temporary transition period. We will also need to look for certain actions in the UK as they look to recast parts of the UK asset management industry for its post Brexit future.
1. COVID-19 Global Pandemic Effects
The onset of the global COVID-19 pandemic was unquestionably the biggest single influence on asset management in 2020. Regulators moved to act as a result with delays and forbearance on certain regulations and increased focus in other areas such as fund liquidity, cybersecurity, and business continuity processes. The global asset management industry has successfully dealt with the remote working environment and generally has proven itself notably resilient throughout 2020. However, regulators are likely to come back to testing items like BCP, operational contingencies, and cybersecurity more intensely than ever before in 2021. Regulators too, had to adapt and evolve also as a result of the remote work environment. Also, a focus on remote work force and return to office protocols are likely to remain, having been a huge factor in 2020.
Personal Take Away from 2020 – Silver Lining
The addition of our video series was one we discussed and planned for anyway, but one of the very few personal upsides of the pandemic and remote working is that it gave us an opportunity and incentive to utilize short videos to convey thoughts on the market and regulation through the OnTheRegs channel throughout 2020. It’s been a very enjoyable addition to the OnTheRegs repertoire. I’ve been proud of the quality and the cadence of output, but also not surprised as I work with a brilliant marketing and video team. It’s been a pleasure to have so many great diverse contributors participate through the year as well.
If you’d like to come on and discuss a topic on the OnTheRegs video series in 2021, please do get in touch to discuss.
In the meantime, the entire OTR team would like to thank you for the continued support, feedback, and contributions throughout 2020 and wish you and your families a happy festive season and a Happy New Year, surely 2021 will be less chaotic, right?