- Two thirds (67%) of UK asset management firms are increasing their risk focus on employee mental health and wellbeing amid the pandemic
- ESG risks are a growing priority area, with the top quartile of UK firms focused on robust governance
- Over half (54%) of UK asset management firms are currently looking to implement new AI or machine learning technologies
In response to the changed ways of working brought about by COVID-19, UK asset management firms are re-focusing their priorities and realigning to new risks. According to EY’s latest report, Risk and Regulation in a digitalised world, employee wellbeing and mental health awareness have risen up the corporate agenda and been brought into sharp focus as firms recognise the emotional toll of the pandemic, the resultant lockdowns and a year of remote working.
EY’s twelfth annual Risk and Regulation survey, which comprises one-to-one interviews with over 40 UK asset managers conducted between July and December 2020, also revealed that firms are reassessing their business models to improve operational resilience, as regulators tighten controls, and are focusing significant attention on risks associated with ESG and liquidity management.
COVID-19 has changed how asset managers work
Almost all UK asset management firms (96%) surveyed said they had the right risk and regulatory controls in place at the time throughout the 2020 lockdowns, and 87% of firms reported the appropriate level of IT arrangements to ensure staff could work effectively from home. Two thirds of firms (67%) also said that employee wellbeing and mental health was a top priority for them, particularly after September 2020, with increasing months spent in lockdown. However, just under a third (31%) of firms admitted they displayed vulnerabilities when it came to extending arrangements to include third party operations and modelling the impacts of COVID-19 on end investors (for example, on pensions funds, insurance firms and sovereign wealth funds).
Gill Lofts, UK Head of Wealth & Asset Management at EY, comments: “The almost overnight shift to remote working last March meant asset management firms – like all UK firms - had to act quickly. That such an office-based and highly controlled industry managed to do this with the right risk and regulatory controls in place is credit to the digital capabilities and agility of the sector. As the pandemic persists, new challenges have arisen, notably around physical and mental health. Ensuring staff, clients and investors continue to be supported appropriately is essential as the future of work is redefined.”
Regulator focus on operational resilience rises but challenges remain for managers
The survey shows the vast majority of asset management firms (90%) have clear escalation and decision-making frameworks to help them manage in a crisis. However, less than half (44%) of firms have an end-to-end approach, and just 39% manage their resilience capability holistically. In addition, only 18% use a single system to document, collate and manage information.
Gill Lofts continues: “Operational resilience - impacting people, processes and systems - is an increasing focus for regulators, and firms’ operational resilience plans will certainly have been put to the test over the last year. While firms are doing well in many aspects, especially around the decision-making procedures of managing a crisis, in other areas there is clearly more to be done. It is concerning that only a small number of organisations are using single systems to manage and organise crisis information flows, and urgent work needs to be done to ensure this and all resilience processes are brought up to standard and continually updated.”
ESG risks are a growing focus but work remains to tighten management
ESG and its associated risks are a growing focus for asset managers. Engagement on this agenda is strong, and 80% of firms are evidencing engagement with the stewardship code. However, as of December 2020 when the survey closed, fewer than half (45%) of firms reported they were on track to comply with the SFDR (Sustainable Finance Disclosure Regulation) rollout and just 15% had signed their intent to be a member of the Net Zero Manager Initiative.
Gill Lofts continues: “ESG continued to mainstream during 2020, and more firms than ever looked to attract ESG investment. The ongoing challenge, which extends far beyond the asset management sector, is the lack of accurate and reliable reported ESG data to benchmark against, and the cost burden to fix this. There have been calls from the industry for the regulators to take a bigger role in this space, and it will be interesting to see how this plays out over time. While the importance of ESG is undoubtedly growing, more work needs to be done across the whole sector to ensure meaningful progress.”
Importance of innovation continues to climb
Innovation within asset management continues its upwards trajectory. Three-quarters (75%) of firms surveyed mentioned new ESG research or analytics tools as a key area of focus, with over a half (54%) of firms now exploring the use of artificial intelligence (AI) or machine learning, and 43% of respondents indicating their firm was offering a robo-selection tool. In addition, 50% of participants claimed to be interested in crypto-assets, smart contracts and/or blockchain.
Anthony Kirby, Associate Partner, UK Wealth & Asset Management at EY, comments: “AI and crypto-assets - such as stablecoins, non-fungible tokens (NFTs) and central bank digital currencies (CBDCs) - are showing rising interest as core tech offerings, and asset management firms are keen to ensure they are keeping pace and have the right capabilities in place to manage the risks that emerge. Of course, questions remain over where central banks and regulators will land with these new innovations and the issue for firms currently is how they push ahead and design their asset allocation models and risk controls in an uncertain regulatory environment.”
Firms are increasingly prioritising liquidity management risk but work left to do
The survey shows only just over two thirds of asset managers (68%) have produced playbooks which model for the possibility of suspensions and fund liquidations. At the same time, less than half (45%) of firms have determined which third party risk management systems to use, which would avoid building costly in-house systems to carry out required stress testing.
Anthony Kirby concludes: “Regulators are increasingly looking at how they can prevent liquidity failures - resulting in a fund collapsing - from happening in the future, and our findings show that a concerning and material number of asset managers still have some way to go to get their house in order.
“The survey overall has highlighted various areas where more needs to be done to ensure firms have the right level of risk controls in place. However, it also demonstrates the considerable work that has been carried out in the risk and regulatory space, particularly over the last year, with a number of priorities having had to shift due to the pandemic and the changing market dynamics.”