- Greater focus on sustainability and ESG post COP26
- Tech driven transformation a key focus for 2022
- New FCA Consumer Duty rules will have huge regulatory impact on AM firms
Dan Hall, UK Head of Wealth and Asset Management at EY, comments:
“As with many other industries, the wealth and asset management sector faced its share of challenges in 2021, and this will continue into 2022 as the post-pandemic economy recovers and post-Brexit uncertainty stretches into the short term outlook. Looking ahead, as the sector continues to strive for growth, the areas of focus for the coming years will certainly include greater sustainability and ESG activity post-COP26, ongoing technology driven transformation, especially in the AI, RPA and cloud space, and the constant managing of regulatory change.”
Sustainability and ESG to top board agendas in 2022 post-COP26
Dan Hall continues:“Sustainability and ESG are themes that had been steadily rising up boards’ agendas over recent years, but COP26 propelled them firmly to the top. Asset managers are currently reviewing, adapting and expanding their product range to meet demand, and it is key that as they do so, ensuring their labelling is correct. It is imperative that products and services termed ‘green’ and ‘sustainable’ are just that, and that the industry keeps clear of greenwashing claims.
“Achieving decarbonisation goals is not going to be an easy task. For asset managers to be able to report effectively on their climate risks and action plans, they must ensure they have access to the relevant data across their value chain and as an industry will need to find standardised ways of disclosing progress – or lack thereof – if they are truly to be held to account.
“While there has been some real progress in the move to net zero, there are still wide variances in what firms are doing and how they are reporting, which makes the industry-wide picture hard to paint, and hard for industry goals to be set. Climate change is of course a hugely complex area and businesses are already dealing with competing corporate demands, but all firms need to make this a priority and bring in the right expertise and knowledge.
“The Government’s Greening Finance Roadmap sets out how sustainability-related regulatory measures are likely to develop during 2022 and possibly come into force from 2023 onwards. The UK Taxonomy will be used to align and accelerate the delivery of the Government’s Net Zero Strategy and will also be used to inform a new UK investment product labelling regime and new Sustainability Disclosure Requirements (SDR), including economy-wide corporate disclosures and more specific corporate and product-level disclosure for asset managers and asset owners. The shorter-term priorities for asset management firms will include collecting Taskforce for Climate-related Financial Disclosure (TCFD) metrics once the FCA’s new requirements come into force, expected early in the new year.
“Regulatory requirements are of course crucial, but firms need to go beyond this. From an internal perspective, they need to demonstrate to their employees their social purpose and what they’re doing to support climate action. Externally, on top of what they’re doing as an individual firm, asset managers must continue their active role in helping their clients, stakeholders and supply chains to drive the transition to a greener economy.”
Tech driven transformation and innovation will be key to long-term success
Dan Hall continues:“Tech driven transformation, especially digital adoption, Artificial Intelligence, RPA, cloud technologies and blockchain, will continue to drive market efficiencies and expand capabilities in 2022. In particular, we are seeing many firms increase their focus on utilising blockchain technologies to transform transaction processes and improve customer outcomes. Hand in hand with the investment in tech, is a significant emphasis on improving data and leveraging the power of cloud-based data platforms. Using the right mix of these different technologies and techniques, alongside human insight and face-to-face advice, will be crucial for success.”
New FCA Consumer Duty rules set to have biggest regulatory impact on firms in 2022
Simon Turner, Wealth and Asset Management Regulatory Leader at EY, comments: “In 2022 we expect continued focus from the regulators on the way firms’ are governed and in particular, their duty to consumers. The FCA’s new Consumer Duty, which is set to be in place by 31 July 2022, is likely to have the biggest impact on firms over the next few years. The measures announced by the FCA recently show their clear intention to create a higher level of consumer protection, putting retail consumers and investors more in control of their finances than ever before. However, there have only been limited rules and guidance published so far - and the implementation deadlines are tight - so asset managers should start to think urgently about how they will ensure they have placed consumers at the heart of their individual business models. This will be a challenging task, but asset managers are well placed on this agenda given the recent drive towards value and reducing instances of consumer harm. Ultimately, the regulator’s intention is to better protect everyone who uses financial products and services, and this is positive for both consumers and financial institutions.
“Continued focus will also be on the new prudential regime for investment firms which comes into force on 1 January 2022, requiring firms to consider and look to mitigate against potential harm on consumers and markets. And firms will need to continue to demonstrate value and report in greater detail exactly how their business models are governed and controlled.”
Other regulatory challenges ahead include UK/EU divergence
Anthony Kirby, Wealth and Asset Management Associate Partner at EY, comments: “Now almost a year since the Brexit deal, the UK and EU are pursuing different agendas post-Brexit. For asset managers this means they will need to work through the regulation across both markets. In its Business Plan in July, the FCA indicated that it wanted to create a domestic market access regime which addressed cross-border regulatory and supervisory risks while ensuring autonomy. And last month’s publication of HM Treasury’s Future Regulatory Framework (FRF) Review will also play a critical role during 2022, overseeing the criteria for how the UK adapts both current and evolving regulatory provisions for wealth and asset management firms in a manner which is right for the UK.
"One of the more topical areas that will test how the UK adapts its regulatory perimeter, its authorisation process and its enforcement regime is in virtual assets, specifically crypto-assets, crypto-currencies and distributed ledger technology (DLT). As well as the potential benefits these technologies bring, they also pose a range of risks to consumers and investors and, depending on their uptake, to the stability of the financial system as a whole. We may not see a formalised Markets in Crypto-asset (MiCA) regulation on the statute books in 2022 in the manner of the EU, but we can assume that the mood music in the UK will be in favour of the FCA fostering a regulatory environment in which firms can innovate, while crucially maintaining quality regulatory conduct standards. This will ensure that consumers and market intermediaries alike can achieve reasonable investment outcomes.”
Alternative Investments continue to grow in scale
Tim West, UK Alternatives Leader at EY, comments: “Alternative asset classes in the UK continue to grow in scale, at around 10% per annum, with increasing adoption by mainstream houses as investors seek outperformance outside fairly muted listed markets. We recently carried out a global Alternatives Survey which highlighted a number of important findings. One of the standout findings was that although investors have an increased focus on ESG factors, rather alarmingly, over a third of alternatives managers are believed to have inadequate policies in place. A separate but equally significant finding was that in addition to record institutional allocations to alternatives, the research found that half of the managers surveyed are seeking growth from retail-like channels in 2022, a trend which will bring a whole new set of technology challenges to the fore as new platforms compete to provide safe and compliant access.”