Climate change. Regulation. COVID-19. Recession. Populism. All these topics and more were tackled by local and international speakers at the FSC’s inaugural Investment Summit this week.
No stone was left unturned as panellists and online attendees debated the challenges the industry faces amidst market volatility and liquidity issues.
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Fink thinks big
BlackRock Chairman and CEO, Larry Fink, set the tone at the start of the Summit, discussing weighty topics including the future of cities, climate change, and what he described as an impending “silent crisis” caused by the low level of retirement savings in many nations.
“Too many people in the world do not have adequacy in terms of savings for retirement,” said Fink. “Globally, we spend too little time focusing on the extreme pool of money that is needed to live in retirement with dignity... As much as we want to talk about long-termism, no one wants to hear about it. The beauty of the investment management industry is really about long-term outcomes and it’s about retirement.”
Here, Fink singled out Australia’s superannuation system for praise. “Australia’s more prepared than almost any country in the world in terms of retirement,” he said. “I wish more countries, including my own, had a similar system.”
During Fink’s eye-opening discussion with FSC CEO, Sally Loane, he also mooted a “seismic reallocation of capital” due to investment risks associated with climate change. “There is no question in my mind that the frequency of events is giving us real evidence that climate change is investment risk,” he said, adding that BlackRock’s allocations to strategies with a climate focus had doubled this year and that asset owners are placing increasing importance on ESG factors.
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“World is changing fundamentally,” says Arndt
On day two of the Investment Summit, Future Fund CEO Dr Raphael Arndt shared his assessment of the global economic outlook, and emphasised the importance of risk management, diversification and scenario planning for fund managers.
According to Arndt, economies could theoretically grow out of the global recession if a complex range of factors all align (effective government stimulus, favourable interest rates, COVID-19 vaccine, etc) but he said that was “at best, a multi-year scenario.”
“Personally, I wouldn’t want to put all my eggs in one basket,” Arndt reflected. “You have to think about what else could happen; it’s incontrovertible that interest rates are zero and negative in real terms right along the bottom of the cliff. So, that means that if [another] shock of any description happens in global economies, really it’s over to fiscal stimulus.”
In conversation with Bryce Doherty, UBS Asset Management, Arndt explained that, in the event of another economic shock, economic policy responses will depend upon the prevailing winds in a politically volatile world where populism has gained traction in many nations. “And that will continue unless we solve the underlying problem, which is that people feel like governments aren’t looking after them and their lives aren’t getting better,” he said.
Reflecting on the economic uncertainty, Arndt said he expected returns to be lower in the next decade and cautioned against taking “excessive risks”, saying now was a good time for the financial services sector to look inward. “Think about how you charge, how you add value, what you’re giving your clients and why that’s justified,” he said, while emphasising the need for transparency from managers.
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DDO regime looms large on horizon
The Investment Summit also provided an opportunity to discuss the most pressing regulatory issues facing the industry. The majority of the audience (59%) said the impending design and distribution obligations (DDO) were the regulatory issue having the greatest impact on their business, and 64% said their organisations were “not ready at all” for the regime, which becomes effective in less than 12 months.
“I think of DDO as an iceberg,” said Fiona Smedley, Partner, Herbert Smith Freehills. “The part of the iceberg above the waterline is the target market determination (TMD) requirements – the obligation on issuers to make, review and publish their TMDs. That’s the part of these reforms that has been most visible and that’s the part that most people have focused on to date.”
Below the waterline, Smedley highlighted a range of additional DDO obligations: “This is where the real work is going to kick in,” she said, highlighting several key components to businesses that may have to change in line with DDO, including record keeping, information processing, distribution arrangements, and product governance framework.
Smedley also flagged the DDO liability regime as a concern. “The DDO legislation is quite small but it is absolutely jam packed full of liability provisions,” she said. “There are 19 new criminal offences and 19 new civil penalty provisions.” She described “a double whammy” of having “more liability provisions in the Act than usual and at the same time having a degree of uncertainty in relation to how we, as an industry, should be interpreting some of these concepts.”
Dr Rhys Bollen, ASIC’s Senior Executive Leader, Investment Managers, explained that ASIC guidance will soon be available to assist with DDO implementation. “It’s close. Like a lot of our regulatory guides, it explains how we understand the law, refers back to the financial services inquiry, explanatory memoranda and other material out there. It includes worked examples, it's got suggestions. I think it will help but there is still a considerable amount of work for firms to do. We can’t give guidance at the product and firm level.”
While acknowledging Smedley’s concerns that DDO was now less than one year away, Dr Bollen emphasised: “This is meant to be a significant change, not an incremental change. It has been a long time coming… We do expect that firms will be doing all that they can to comply.”
To prepare for the DDO regime, Smedley said the industry should seek to collaborate, where possible. “A key challenge is to implement the reforms consistently so that we can achieve that efficiency and actually achieve the purpose of DDO. It is going to be really important to work together… A lot of work has already been done in that space, but there is more still to be done, particularly in how to interpret the principles-based concepts and how to manage the information flows across the industry.”
Dr Bollen agreed the industry should work together, to a certain extent. “[At ASIC] we took the view that ASIC publishing templates wasn’t the most helpful step because there is such a diversity of products and participants. Where there is commonality between members of an association, coming up with templates makes sense. But at the end of the day, we don’t want to see boilerplate responses either. Yes, work together by all means but the identification of the target market, the design of the product, the monitoring and the distribution has to make sense for that product and that firm.”
The FSC has been working with members to develop guidance on Target Market Determinations (TMDs) for funds management, life insurance, wraps and superannuation master trusts. This guidance is largely finalised, and is currently available to FSC members to use and adapt as required, and will be available for license by non-FSC members.
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