Meliosa O'Caoimh, Northern Trust
: We continue to watch the global economy with interest. Equity markets have been growing, especially in the US, and interest rates have remained low. We will be watching how those market moves impact the commercial realities of the fund manager and servicing commercial footprint: for example, would choppier financial markets lessen the impact of passive investing?
Meliosa O Cuiv
Will an increase in interest rates change the way that clients and investors behave?
These will be critical questions for us to discuss with our clients in terms of how the macro environment will shape their investment thinking in the next three to five years. We are also aware that EU fund structures operate in an environment now where a large proportion of the world’s investor base and investment talent are outside the bloc yet using EU funds. From a political and regulatory perspective, how various international bodies think about these ever-more complex relationships will help define how the industry and our business will evolve.
Ross McCann, Alter Domus
: The industry’s major risks are those it cannot fully see or adequately plan for. Political shifts and associated instability may create different market dynamics in the future and the increasing influence of social media will contribute to this. We have already witnessed a number of populist ‘shocks’ in recent years which have tended to be more nationalistic in nature. The next three years, for example, will tell us a lot about the longer-term relationship between the EU and UK. Will the UK stay relatively aligned with the EU or will we see significant divergence begin? Will financial services regulatory nationalism, backed by political nationalism, lead to a ‘race to the bottom’?
This could lead to a risk in stability where investors, particularly institutional ones, crave stability. EU countries benefit from regulatory alignment, allowing passporting and barrier-free access to each other’s markets. There are also alignments and collaboration in terms of security, including cyber security. Brexit has removed what was arguably the lead EU player in terms of financial services, which undoubtedly raises risks of exploitation when it comes to cyber security. There has also been a well-documented rise in cyber security attacks and scams in the wake of the Covid-19 pandemic which regulatory authorities will have to address by adapting and changing WFH policies.
We did not foresee the magnitude of the Covid-19 pandemic, and there is a reasonable risk of further pandemics which, depending on the nature of the virus, could have quite different impacts. Outsourcing is an effective way to mitigate risks caused by pandemics as a well-resourced third-party service provider should in theory be able to maintain BAU functions. In contrast, managers have much smaller teams with individual absences more keenly felt.
Falling fee margins combined with greater regulatory barriers to the market will see continued consolidation in the market through M&A activity, particularly for third-party service providers. As mentioned, falling margins may be somewhat offset by outsourcing technology, and lower post-covid overheads.
In regard to integrating ESG into business models, I don’t believe this represents a risk to the market. Some managers will undoubtedly find it more challenging to incorporate ESG than others and it will indeed open the door to new managers with no ‘baggage’, which should be viewed as healthy. Of greater concern would be differing geographic ESG standards and accountability, and ease of implementation of standards. In this regard it is important for regulators, politicians, and the industry to work closely together to ensure the market has both transparency and choice.
Tadhg Young, State Street
: The funds industry is facing a challenging environment over the coming years. On a micro level, the sector faces a number of regulatory challenges: following the UK’s departure from the EU, the sector continues to adjust to the evolving nature of the UK-EU relationship and its implications on how the wider financial services industry operates across Europe, including ongoing focus on delegation arrangements. In addition, there remains strong focus on financial stability and the potential risks presented by the asset management sector. Work continues on the International Organization of Securities Commissions (IOSCO) and Financial Stability Board (FSB) level, in particular with regards to money market funds and liquidity risk management, and possible measures should become clearer in the course of this year. Not to mention the various European initiatives that will be of relevance, such as the reviews of AIFMD and Markets in Financial Instruments Directive (MiFID). These various regulatory changes occur against a background of increasing industry consolidation, fee pressures and challenges from new market entrants.
On a macro level, a major financial risk is debt levels as a result of the injections of monetary and fiscal stimulus used to stabilise economies during the pandemic-induced shutdown of economic activity. Sovereign and corporate debt issuance has been at record levels, fuelled by low interest rates and the pandemic. The challenge for policymakers over the next few months will be to calibrate additional stimulus to support recovering economies, while avoiding the risks of overheating and feeding excessive inflation.
The major medium-to-long term systemic financial risk we all face is of course climate change. Despite clear evidence of various climate-related risks, it appears that little of this risk has been priced into markets. More work needs to be done in this area together with more global harmonisation of data and disclosure standards.