Right now, John Kay’s interim report of his review into the equity markets is one of the best reads around.
His brief is to examine whether our capital markets foster investment decisions that will benefit the economy in the long term. He doesn’t give any clues as to his eventual recommendations, but the analysis of the issues is thorough-going and stimulating.
His starting point is absolutely correct: that capital markets are there to help companies and public bodies raise money, and to help savers to invest. Everybody else is an intermediary.
He also points out that, in today’s markets, one of the most important groups of those intermediaries is asset managers. This is something that asset managers have long known, but that policymakers and others have sometimes been slow to cotton onto. If investment capital is to be allocated in the most efficient way for the future benefit of the economy, the decisions of the professional managers of savers’ money are critical. (IMA blog continues below)
Particularly interesting are his comments that regulation is focused too much on process and the detailed workings of the market, paying too little attention to outcomes for users. It has long been a source of frustration at the IMA when regulatory policy decisions are taken which appear to benefit those who form the market rather than those who use it; we had to battle long and hard a few years ago to get recognition that banks owe a proper duty of “best execution” to their asset manager clients, for example. This has been changing of late, particularly since the credit crisis. Kay is likely to give it a hefty push in the right direction.
This greater recognition of the significance of asset management is leading the industry to think about itself in a different way. Asset management’s roots are as backroom boys – part of the inner workings of a pension fund or the investment department of a life insurer. That ceased to be the case twenty or more years ago, but perceptions tend to lag reality. The industry is now becoming more assertive in speaking up for its interests and those of its clients – ultimately ordinary savers. And it realises it has to engage with public policy debates.
That in turn brings greater scrutiny. The current debate over fund charges and transparency well illustrates that. So do the expectations now being placed upon the industry to deal with excesses in executive remuneration. Critical scrutiny is not something to be frightened of, but should be welcomed. And it will become more frequent as more and more people realise that this is the industry upon which they depend for a decent retirement.
John Kay’s final report is due in the summer. It looks like being another important staging post for an evolving industry.
Richard Saunders is chief executive of the Investment Management Association.