© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
Daniel Godfrey has chosen an interesting time to take the helm of the Investment Management Association, the UK’s leading fund industry trade body.
He has settled into the hotseat just weeks after the regulator, the Financial Services Authority, launched a broadside at the industry, saying it had evidence that abusive business practices were pervasive.
In particular, it said conflicts of interest were rife, with some managers failing to meet requirements on disclosing commission payments, not trading in customers’ best interests and spending millions of pounds of investors’ money on buying research and execution services from brokers without checking the services were eligible to be paid for in that way.
Mr Godfrey concedes the FSA’s crackdown is “an important review and we have to deal with it effectively as an industry”.
Yet he believes the failings identified by the regulator are more a case of sloppy controls, rather than evidence that slipshod practices are damaging the interests of investors.
“The FSA are saying that they found too many cases of a lack of effective controls over conflicts of interest. They are not saying that they found evidence that this has led to any substantial customer detriment,” he says.
As to any suggestion that some investment houses may have let standards slip, in the belief that the FSA had other priorities, Mr Godfrey says: “Firms will prepare for what is in the exam and in the past this hasn’t been the greatest area of FSA focus.
“We need to make sure we understand what good practice looks like in terms of compliance, with the FSA, lawyers and our members. We want to facilitate what a common vision of good practice looks like.”
One area highlighted by the FSA involves the unnecessarily murky system by which fund groups recompense brokers for their research by directing a chunk of trading commission their way.
Mr Godfrey believes the regulator wants asset managers to be able to show they are rewarding brokers because “they value their research, not because they got taken out to dinner”.
In common with many observers, Mr Godfrey wonders why investment houses “don’t just pay cash for research” and then seek the cheapest execution, in order to maximise transparency, but points out that the FSA has approved the current convoluted system of payments.
He also asks why asset managers are apparently directing ever more of their commission payments to brokers that can deliver access to senior management at investee companies, or can guarantee invitations to investor roadshows. “My view is that all shareholders should be treated equally. Companies doing roadshows should always make the effort to create opportunities, such as by hosting webinars, for all shareholders to participate and ask questions on equal terms,” he argues.
Mr Godfrey also has a suspicion that some house brokers may not always be working in the best interests of companies.
Instead they may grant preferential access to hedge funds that may pay lucrative commissions, but will go on to short the company in question.
Mr Godfrey has plenty of experience of dealing with such controversies. His 11 years as director-general of the Association of Investment Companies encompassed the split capital investment trust scandal, which saw 25,000 small investors suffer big losses after buying what they were told were virtually risk-free securities. In 2007, following a five-year probe by the FSA, 20 split cap trust providers agreed to pay £194m into a compensation fund for investors.
He says his time at the AIC has allowed him to see both sides of the corporate governance debate, another of today’s issues, as investment trusts are investors in trading companies but are also companies in their own right, and thus need to engage with shareholders.
He is keen for investors to focus on “high quality” engagement and, where that fails, to engage collectively, in order to move towards longer-term decision making, as recommended by the UK’s Kay Review. Mr Godfrey argues that this duty to engage constructively applies to passive managers and active managers who are underweight a stock, as much as it does to those who are overweight.
This throws up a potential conundrum; an underweight manager who improves the performance of a company through engagement would worsen their relative performance as a result. Mr Godfrey understands the point, but argues fund managers should prioritise the absolute returns of their customers, by aiming to “raise all ships”, over their own personal ranking in the performance tables.
He refutes suggestions that his members bear a significant slice of the blame for the global financial crisis for failing to ask more questions of the banks they shovelled investors’ cash into. “Maybe we could have been sharper in working out that some developments in the banking sector could end in tears, but it’s easy to be wise after the event,” he says, pinning the bulk of the blame for the financial crisis on the collapse in confidence between banks, not helped by the “pro-cyclical” nature of regulation prior to the crisis.
As for the role of asset managers, he merely says: “if you pick up the stones and look under them, you will inevitably find some things that aren’t too pretty, but investment management is an industry that has a great deal to be proud of.”
Despite the attendant controversies, Mr Godfrey, who succeeds Richard Saunders after an 11-year stint in the hotseat, is upbeat about stewarding an industry with “massive potential”.
“Globally there is a need for people to make more provision for their futures. As developing countries become more developed there will be an increase in long-term saving and investment. The UK industry is probably better placed than anybody to serve that need,” he argues.
Investment Management Association
Number of members
191, with combined assets under management of £4.2tn, as at Dec 2011
Number of employees
University of Manchester (BA in economics, politics and social anthropology)
Fuqua School of Business, Duke University (International Marketing Leadership Programme)
Marketing director, Fleming Investment Trust Management
Chairman, Personal Finance Education Group
Director general, Association of Investment Companies
Chair, simple & transparent products working group, HMT Retail Financial Services Forum
Communications director, The Phoenix Group
Chief executive, Investment Management Association
Please don't cut articles from FT.com and redistribute by email or post to the web.
FTfm is the voice of the global fund management industry, providing must-have news and sharp analysis to the world’s top asset managers and professional investors.