IFA Magazine - March 2016 - Issue 46 by Alex Sullivan

For todayâ&#x20AC;&#x2122;s discerning financial and investment professional

March 2016

Keeping an Eye on the Price of Oil

Outlook for Global Bond Markets 2016

ISSUE 46

Strategising Your Exit Part Two

FCA: Uneasy lies the head That Wears a Crown

CONTENTS March 2016

CONTR I B UTOR S

3 Carpe diem

5 News

Brian Tora an Associate with investment managers J M Finn & Co.

Keeping a close eye on the price of oil

Lee Werrell a senior compliance consultant and industry adviser.

15 Where next for Indian equities?

Richard Harvey a distinguished independent PR and media consultant.

18 Strategising your exit

Neil Martin has been covering the global financial markets for over 20 years.

What’s the outlook for global bond markets in 2016? Michelle McGagh brings a wealth of experience on industry developments.

26 Will China turn?

Michael Wilson Editor in Chief editor ifamagazine.com

Do ethical investments pay?

Sue Whitbread Commissioning Editor sue.whitbread ifamagazine.com

Just how do they do it?

Alex Sullivan

FCA: Uneasy lies the head

Publishing Director alex.sullivan ifamagazine.com

IFA Magazine is published by IFA Magazine Publications Ltd, Loft 3, The Tobacco Factory, Raleigh Road, Bristol BS3 1TF C

‘IFA Magazine’ is a trademark of IFA Magazine Publications Limited. No part of this publication may be reproduced or stored in any printed or electronic retrieval system without prior permission. All material has been carefully checked for accuracy, but no responsibility can be accepted for inaccuracies. Wherever appropriate, independent research and where necessary legal advice should be sought before acting on any information contained in this publication. IFA Magazine is for professional advisers only. Full details and eligibility at: www.ifamagazine.com

WELCOM E March 2016

Carpe diem Maybe we shouldn’t be so very surprised that nearly one in five of the over-5 5s who drew down from their newly liberated pension pots during the last nine months of 2015 had spent every last penny by the time this January came around? That news won’t have gone down particularly well with anybody, I imagine. And, at first glance, it does seem like a step backwards from the reassuring results for the first quarter of pensions freedom (April to June 2015), when the great majority of draw-downers had taken a bit of cash to buy a car or a carpet, and had then sensibly reinvested the remainder into income funds and suchlike. Could Britain’s oldies really have become so irresponsible with the approach of Christmas? Well, I’d venture to say that there’s probably more flannel than fact in HMRC’s figures – or rather, in the press’s interpretation of the report that was recently issued by the Pensions and Life Savings Association. According to the PLSA, HMRC statistics showed that 188,000 pensioners had indeed drawn £3.5 billion in cash from their newlyliberated pension pots since last April. But to me, the startling thing was not that 18% had splurged all the cash on home improvements or

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on paying off the mortgage. It was that the other 82% hadn’t. I mean, haven’t the newly retired always squared up their accounts in this sort of way? And isn’t that exactly what the 25% tax-free allowance has always been designed to achieve? Small Change Let’s remind ourselves briefly that 188,000 people drawing down £3.5 billion represents a per capita sum of less than £19,000 - which must have meant that some of the 18% cash-splashers were into trivial commutation territory anyway. And let’s also reflect that fully 32% of the people surveyed by the PLSA bought an annuity instead – far in excess of the industry’s expectations last spring, when pundits were predicting a 90% shrinkage of the annuity market by now. The bad news, you might say, was that most of the 43% who chose drawdown last year have been letting the money lie fallow. 61% of these people told the PLSA that they’d stuffed the money into pitifully low-yielding

cash deposits or cash ISAs, rather than chancing their luck on the shares or property markets. And barely one in five said they’d bothered with the Pension Wise service. Where’s The Alternative? How very unadventurous, you might think. And how risky, too, since cash lying around in the bank is always easier to raid than money in shares or funds, which impose at least a nominal hurdle when you come to sell them off. But then again, what kind of message has the market been sending these people? I’ll start you off with stock market volatility, falling corporate dividends, the collapse of old faithfuls like banking and mineral companies, and a 21% fall in the Footsie during the year to early February. Not to mention the signs of a stalling US economy during the final quarters of a presidential election year that might very well end in democratic disaster. Hmmm, maybe the prodigals deserve a little more understanding?

N EWS March 2016

Simpler Advice Model Would Help, says Metlife Research commissioned by MetLife concludes that the cost of providing advice is the biggest barrier to advisers offering their services to mass market savers. The research was commissioned as part of MetLife’s response to the Financial Advice Market Review (FAMR). The figures revealed that over two-thirds of advisers say costs of providing advice outweigh the returns. Also, just over half warn that regulatory barriers and risk of providing advice are the main reasons preventing them helping mass market savers. MetLife believes that reforms of the Financial Services Compensation Scheme levy for advisers and the streamlining the Financial

Ombudsman Service would help reduce costs for advisers. It also recommends reasonable and proportionate time-limits on FOS claims against advisers from consumers.

Managing Director of MetLife UK Dominic Grinstead said: “It is clear that the current environment is not serving the best interests

of the less well-off. The lighter touch model would be equally robust in terms of ensuring that the best possible outcomes are achieved for customers, but crucially it would be designed to be appropriate for the needs that the mass market are more likely to face. “Consumers have varying needs and for those with less sophisticated investment needs, a simpler advice model may be more appropriate. This in turn, would benefit from a proportional, lighter touch regulatory framework, which would reduce costs and make advice more easily accessible. Digital technology also has a role to play together with other channels to market, ensuring that consumers have a choice of how advice is delivered to them.”

Relaunch for Sanlam’s Marlow office UK Wealth Management firm Sanlam announced that Marlow will act as its regional hub for the group’s push into the Thames Valley area. It is looking to recruit qualified financial advisers to join its wealth planning team. The office already has more than £150m of funds under influence, delivering financial planning and wealth management services to existing private clients in the area. It will also provide employee benefits and autoenrolment advice to its corporate clients, and service the legal and accounting

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community. It hopes to grow its business throughout 2016. Based at the office are three Sanlam wealth planners and two discretionary fund managers, supported by administrative staff. Paraplanning support to the wealth planners is to be delivered by the centralised team in Bristol. CEO Sanlam Wealth Planning Alex Morley said: “2016 will see the launch of a new era for Sanlam in the UK where we will, I believe, take our place amongst the leading wealth management businesses in the country.

We have been building our presence steadily in the Thames Valley over the last couple of years and our revitalised presence in Marlow will strengthen that further. “

N EWS March 2016

Mattioli Woods announces record results and acquisition of Maclean Marshall Healthcare Wealth management and employee benefits adviser Mattioli Woods has released record interim results for the year to 30 November 2015. Financial highlights included revenue up 20.0% to £19.90m (first half 2015: £16.59m) and an adjusted EBITDA up 18.4% to £4.32m (£3.65m). In February, the company also announced it had acquired Maclean Marshall Healthcare, a specialist healthcare and protection business based in Aberdeen. The deal brings with it an experienced manager and around 80 new corporate clients. This latest deal adds to two other acquisitions completed in the period. CEO Ian Mattioli said: “We are delighted to report further strong growth in the first half of this financial year. We grew revenue by 20.0% and saw our discretionary assets under management growing by over 24.1% to £1.08bn, despite the adverse impact of volatile investment markets on equity and bond values. “In our wealth management business, the positive impact of new business wins and recent acquisitions more than offset a £0.66m fall in banking income, following the further cuts in interest margin we had anticipated. Strong demand for advice and the continued development of our consultancy team has driven increased new business flows, which together with the three acquisitions

completed during the period increased total client assets under management, administration and advice by 29.5% to £6.49bn. “As previously reported, Bob Woods will stand down as Executive Chairman in October 2016, and has decided to stand down from the Board at the same time to allow

Financial highlights included revenue up 20.0% to £19.90m (first half 2015: £16.59m) and an adjusted EBITDA up 18.4% to £4.32m (£3.65m) him to focus on the things that have made Bob and the business such a great success. Bob has been instrumental to the success of the Group and in this new role we will continue to benefit from his experience and insight. The period from now to the Annual General Meeting provides for a considered handover of Bob’s Board responsibilities to our Deputy Chairman, Joanne Lake. “Against a backdrop of volatile financial markets, regulatory and legislative change, in the second half of this financial year we expect sustained demand for advice from clients, offsetting any impact lower asset values have on investmentrelated revenues.

“We are broadening our proposition as trusted adviser, product provider and asset manager and believe our blend of wealth management and employee benefits positions us well to deliver further strong shareholder returns going forward. Executive Chairman Bob Woods (pictured) said: “I am proud of the business I have helped create. Over the last 25 years a large part of our advice has been to assist our clients with their long term investment and succession planning. Given the strong positioning of the Group and the experienced management team we have in place, I now intend to stand down from the Board in October but will remain in a full-time executive role. My focus will be on acting as an ambassador for Mattioli Woods, new business development and my existing client portfolio. “I believe the Group is well placed for the next phase of its evolution.”

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N EWS March 2016

LE BC increases profits and reports unprecedented increase in activity from auto-enrolment

John McVitie LEBC Group, the national IFA, pensions and employee benefits consultancy, has increased its operating profit by 66% to £1.8m (2014: £1.1m) for the year to 30 September, 2015. Turnover was up 22% to £15m from £12.3m. The company said that the growth was being driven primarily by an unprecedented increase in activity from auto-enrolment (AE), defined benefit consultancy and pension freedoms. It also said that this growth would likely

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be maintained during 2016. Chief Executive of LEBC Group Jack McVitie (pictured above) said: “We have maintained our focus on increased efficiency and better use of technology which provides greater access to advice to our existing and ever increasing number of new clients. We have also continued to benefit from the positive impact of pensions freedoms with the extension of choice and opportunity for planning that this gives to clients.

“Given the sharp increase in demand for advice, we have coined the term “bionic advice”. This is the use of technology and human interface with the client to deliver appropriate solutions. We see this combination as the only way to fully embrace this growing advice demand. “We now have 15 offices spread evenly across the UK and each one has enjoyed a very good year. We have maintained a proactive recruitment programme for qualified and part qualified advisers, and paraplanners along with the introduction of a graduate scheme. These programmes will remain in place during 2016 so we will continue to attract the necessary talent to ensure that we are meeting the demands of our growing client base, the business and ever changing sector.”

N EWS March 2016

Is Intrinsic in talks to buy Tenet? Rumours suggest that preliminary talks have begun between the two groups. Tenet is owned by three life companies: Aegon, Aviva and Standard Life and it is thought that they are ready to sell. Intrinsic is owned by Old Mutual Wealth and is said to be on the hunt for acquisitions. Back in 2013 it bought Positive Solutions from

Aegon. Intrinsic boss Andy Thompson told the media he had spoken to Tenet, as well as other firms, saying he was always on the look-out for opportunities to grow distribution. Tenet CEO Martin Greenwood said: “Such stories appear on a regular basis but Tenet’s position remains the same: the company does not comment on speculation.”

Tilney Bestinvest bid for Towry dismissed as speculation A story which suggested that Tilney Bestinvest was planning a £700m bid for rival wealth manager Towry has been given the cold shoulder. A Sunday Times report quoted insiders, saying that the two groups were planning

to get together and create a giant investment firm with assets under management of over £18 billion. Yet within 24 hours the report was played down by sources close to the deal, who said that Tilney Bestinvest owner Permira Capital was

not planning such a bid and that the story was based on speculation. Towry is currently up for sale after its private equity owner Palamon Capital Partners decided against a listing on the FTSE250.

E IS Magazine leads ground-breaking initiative to change the narrative on E IS, VCTs and BPR Over the past five years the editorial team at IFA Magazine and our sister publication EIS Magazine have championed educational insight and investment opportunities within new growth areas for advisers across the financial services sector. Led by the chairman of IFA Publications, Paul Wilson, the team at EIS magazine is now driving forward a brand new campaign to change the negative narrative surrounding EIS, BPR and VCT schemes. The campaign gets underway this spring with the creation of a working group made up of specialists and industry leaders. The group will work to devise a new communications strategy

to reflect a more positive narrative around these schemes. The campaign is centred around the argument that it is time for these schemes to be considered in their own right as valuable investments, as well as for the broader impact they have on growth in the economy rather than simply for their tax efficiency. The campaign is supported by EISA. It is intended that this will help raise awareness with consumers and also support advisers in areas of due diligence. More details on the campaign can be found in the March edition of EIS Magazine which accompanies this issue of IFA magazine.

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N EWS March 2016

Parmenion founder Richard Mein dies aged 52 IFA Magazine was very sorry to hear the news that Richard Mein, founder of Parmenion died on 16 January following a short battle with cancer. He is survived by his wife, son and daughter. Parmenion opened for business in 2007, with Richard and a small team, several of whom still work in the firm today. His vision was to harness new technology, supporting the widest possible choice of professional investment proposition, to make life simpler and business more efficient for financial advisers. His vision was to improve the outcome of investing for retail customers. The service standards he

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insisted on achieved a level of recognition and respect among advisers and the wider industry of which Richard was justifiably proud. His drive for the next horizon led him to launch the UK’s first online regulated advice system in July 2014. Rennie Miller, Executive Chairman of Parmenion, commented: “Richard’s fundamental belief was that financial services should be bought and not sold and he was mindful that the world over, people are looking for more modern and efficient means of buying products and services. “Richard was an entrepreneur, establishing a business that did not fall

within the usual boxes of either platform, technology or investment management but instead he vertically integrated all three functions. The industry took some time to appreciate the brilliance and foresight of this move. “Richard’s inspirational integrity and determination to “do the right thing” means that in his memory, management will continue to take his vision forward. Parmenion will continue to flourish and provide a bespoke service without compromise within the larger Aberdeen group.”

N EWS March 2016

Adam Gent

Legg Mason makes changes to annual management charge Legg Mason has announced its post Retail Distribution Review (RDR) Sunset Clause share class strategy. Legg Mason Investment Funds says that it will be reducing the annual management charge (AMC) for Class A shares, which are available to retail and institutional investors. The changes come into effect from 1st April, 2016. The AMC for fixed income funds will be reduced by between 0.40% and 0.45% for Class A shares, depending

on the sub-fund. The initial charge for subscriptions will no longer apply. The AMC for equity funds will be reduced by 0.50% for Class A shares. The initial charge for subscriptions will no longer apply. Head of Sales at Legg Mason Adam Gent said: “With the advent of the RDR sunset clause, we have taken the decision to review fees because we believe that it is the best thing to do for our clients. With the considerable

reduction in our fee levels, it will provide a more competitive fee structure for our clients. Our aim is to make sure that investors continue to receive value for money from our UK based fund range.”

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Discover more and visit: www.leggmason.co.uk/retirement/ or call +44 207 070 7444 * The Fund changed its name on 24/11/2015. The fund was previously called the Legg Mason IF Western Asset Global Blue Chip Bond Fund (prior to 29th June 2015, the Legg Mason Global Blue Chip Bond Fund). The objective and investment policy of the Fund has also changed; therefore performance prior to 24/11/2015 was achieved under circumstances that no longer apply. This is a sub-fund of Legg Mason Global Funds plc (“LMGF plc”), an umbrella fund with segregated liability between sub-funds, established as an open-ended investment company with variable capital, organised as an undertaking for collective investment in transferable securities (“UCITS”) under the laws of Ireland as a public limited company pursuant to the Irish Companies Acts and UCITS regulations. LMGF plc is authorised in Ireland by the Central Bank of Ireland. It should be noted that the value of investments and the income from them may go down as well as up. Investing in a sub-fund involves investment risks, including the possible loss of the amount invested. Past performance is not a reliable indicator of future results. The information and data in this material has been prepared from sources believed reliable but is not guaranteed in any way by any Legg Mason, Inc. company or affiliate (together “Legg Mason”). No representation is made that the information is correct as of any time subsequent to its date. Before investing investors should read in their entirety LMGF plc’s application form and a sub-fund’s share class KIID and the Prospectus (which describe the investment objective and risk factors in full). These and other relevant documents may be obtained free of charge in English, French, German, Greek, Italian, Norwegian and Spanish from LMGF plc’s registered office at Riverside Two, Sir John Rogerson’s Quay, Grand Canal Dock, Dublin 2, Ireland, from LMGF plc’s administrator, BNY Mellon Investment Servicing (International) Limited, at the same address or from www.leggmasonglobal.com. This material is not intended for any person or use that would be contrary to local law or regulation. Legg Mason is not responsible and takes no liability for the onward transmission of this material. This material does not constitute an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not lawful or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation. Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London, EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorised and regulated by the UK Financial Conduct Authority. This information is only for use by professional clients, eligible counterparties or qualified investors. It is not aimed at, or for use by, retail clients. A16043_Retirement_Income_Bond_Fund_Advert_IFA_Magazine_210x297mm

B R IAN TORA March 2016

Keeping a close eye on the price of oil The fall in the price of oil may have brought about a useful boost to hard pressed consumers, but it is producing some interesting – and worrying – side effects. On the plus side, the return to petrol pump prices of less than a pound a litre – a level that has not been seen for some time – is allowing interest rates to stay low and helping people feel generally better off. On the negative side, many countries that rely on oil exports to keep their economy ticking along are really starting to hurt. This is starting to manifest itself in markets, with some sovereign wealth funds needing to raise cash to help balance the books back at home. According to the Wall Street Journal, these funds withdrew some $100 million from asset managers looking after portfolios on their behalf during the six months to the end of September last year. A further $20 million is believed to have been withdrawn by state institutions during the last quarter of 2015 and if anything the pressure on these funds is intensifying. We already know from major investment management firms, such as

Aberdeen Asset Management, that mandates have been withdrawn or curtailed. Other fund houses believed to have suffered from the withdrawal of money they are managing include BlackRock, the world’s biggest investment manager, Northern Trust, Franklin Resources and Old Mutual. Many of the world’s largest sovereign wealth funds have been built up on the back of oil revenues, so with the price of oil languishing close to $30 a barrel, is it any surprise these funds need the cash.

With the price of oil languishing close to $30 a barrel, is it any surprise these funds need the cash? There is now a lot riding on how the oil price behaves in the months ahead. I take comfort from the knowledge that experts in this field are divided in their opinions on what the future holds for oil, but the pessimists paint a dark picture of the consequences of a continued slide. The Royal Bank of Scotland went so far as to issue a warning to clients

to dash for cash as a further financial crisis brought about by the deflationary pressures stimulated by a lower oil price could not be ruled out. Certainly, at the current level, few oil producing fields can be making a profit. BP has announced that it will be trimming 4000 jobs – around 5% of its global work force – with 600 being shed in the North Sea. The knock on effect to communities reliant on a prosperous oil industry will be just as damaging. In Aberdeen, arguably the capital of North Sea oil, a recession is already in place. Anecdotal evidence suggests that even such mundane transactions as selling a used car have now become hard to achieve. But it is the ripples that reach financial markets that cause the greatest degree of concern. Even such seemingly secure wealth funds such as that created by Norway may see the need to have their resources dipped into if the oil price does not improve. The International Monetary Fund is also concerned. These wealth funds are large owners of government debt, so one side effect of their need to create liquidity could be wholesale selling of bonds, placing upward

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B R IAN TORA March 2016

pressure on interest rates. This worries the IMF. Even if the oil price stabilises – and there are those who are predicting a fall to as little as $10 a barrel – there is likely to be a significant impact on financial markets. At the very least there is likely to be a substantial shift in the way in which sovereign wealth funds accumulate assets. If quantitative easing runs down and sovereign wealth funds cease to be

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buyers of Treasury bonds, then it is hard to see where the buyers of government debt will come from to help finance an administration’s spending plans. Far be it from me to adopt the role of a prophet of doom, but we do need to keep a close eye on the oil price. As it happens I retain much of my optimism and view the shakeout in markets as more of an opportunity than a threat, but that is not to

say things couldn’t go pear shaped, perhaps because of developments as yet unseen. It certainly does feel strange that oil remains subdued in price while so much turmoil exists in the Middle East. Who knows – we may yet welcome a return to a petrol price of more than 130p a litre? Brian Tora is an associate with investment managers, JM Finn & Co

I N DIAN MAR KET OUTLOOK March 2016

Where next for Indian equities? India has been the standout performer in emerging markets since the beginning of 2014. However, investors have recently become increasingly concerned about India’s future growth potential. Is it time to re-evaluate or is the long term growth story still just as compelling? These concerns have led Neptune, and other market participants, to believe that the significant improvement in the macro environment over the past two years has

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been priced in. To sustain and drive multiples higher, something more is needed. Kunal Desai, Head of Indian Equities at Neptune and manager of the Neptune India Fund identifies five key areas that he believes could hold the key to the continuation of India’s growth. 1. Reforms The current approach from policymakers is to look away from the headlines and focus on the detail. In reality, it is our view that micro reforms matter most for India at the moment, given the disarray that the Congress party had left behind. IndusInd Bank spoke of the extent to which administrative reforms – which require no parliamentary approval – had already laid the foundations for accelerating growth. They are confident that big ticket legislative reforms (which excite global investors) will be squeezed through, but no concrete timeline was provided. Political analysts argued that Modi had to be more collaborative with the opposition and move away from the perceived arrogance attained by his absolute majority. This was reinforced by the BJP’s defeat in the recent Bihar election. It

was noted that the day after the loss, the BJP relaxed FDI restrictions in 15 sectors (the biggest move in 18 months), so it is believed that the loss has the potential to focus the reform intent. Although some of the BJP’s headline bills have not been passed, a raft of reforms have been introduced. Clean and transparent coal and spectrum auctions have laid a platform for future resource allocation; there has been a structural reduction in corruption at ministries (this is a consistent message from corporates); the ‘Make in India’ campaign has become central to most corporate strategies (Foxconn has committed $5bn to development in India, whilst GE & Alstom have committed a combined $6bn); 192mn new bank accounts have been set up with $4bn of new deposits under the Government’s Financial Inclusion initiatives, and many other bills have been passed. So we believe the reform agenda is not broken. Expectations have reset to react positively to incremental newsflow and global investors should hopefully understand the merits of the micro reforms once their impact on earnings becomes clear. 2. Capital expenditure India is still the fastest growing major market in the world, with Neptune’s estimates for GDP growth in FY 2016, 2017 and 2018 currently standing at 7.35%,

I N DIAN MAR KET OUTLOOK March 2016

7.40% and 7.90%, respectively. However, it has not felt like that recently. Private sector capex has been absent, due to companies having overleveraged balance sheets and being in a period of capex restraint, so it has fallen to the public sector to stimulate economic growth. As a result, we have seen evidence of public sector participation, particularly in roads and rail. Macro sensitivities remain strong, with falling twin deficits, a low oil price, improving FX reserves and falling inflation, but to move from a GEM relative return story to an absolute return story requires an earnings upgrade cycle in order to kick-start a fresh investment cycle. It is worth noting that the following green shoots are emerging: car sales have grown 22% year-on-year; commercial vehicle sales have grown 12%; oil demand has risen 15%; air traffic is 19% higher; and power demand has increased 8%.

However, this growth is not broad-based – credit growth and rural indicators remain depressed. We believe that the key indicators going forward will be housing sector inventories, order book flow (and execution) and rising asset utilisation.

India is still the fastest growing major market in the world

3. Earnings This area has been the major disappointment for us thus far. India still struggles to break free from the disinflationary and falling global trade influences – whilst the country’s current account deficit has improved, exports in October fell -17.5% year-on-year and imports were down -21.2%. In our opinion, a critical driver for the market over the next 2 years will be the extent

of a recovery in earnings; we remain optimistic about this. Firstly, asset utilisation is at a low of 72%; secondly, as mentioned above, demand is now coming through in a few areas; and thirdly, corporates are still conservative on capital expenditure. The combination of these three factors presents a fertile environment for ROE improvement and rising return ratios. As return ratios exceed the cost of capital, companies are incentivised to increase capex to capture the promise of future growth, thereby kick-starting the aforementioned investment cycle. The companies we have met agreed that our thesis holds, but the delay in this phenomenon taking hold has been frustrating for them and for us. 4. Devolution and distribution of public money We believe that by the next general election in 2019, one of the most significant legacies of Modi’s term is likely to be the ‘Cooperative

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I N DIAN MAR KET OUTLOOK March 2016

Federalism’ model, which incentivises States to compete with each other on development. Ranking systems are now being put in place for the States, based on metrics such as FDI investment, public infrastructure, job creation and social indicators. As a result, reform is just as important from a bottom-up basis (driven by the States) as from top down. There is an understatement of what has already been achieved and the State governments, with their increased power, are also applying political pressure to obstructionism at the Centre. This cooperative yet competitive approach is disrupting the political landscape and inducing what we view as real change. 5. Automation and technology The threat that automation poses to jobs has been topical in recent months. The bear case for an emerging market like India is that labour-intensive sectors

are dwindling just as India reaches its demographic dividend and emerges as the largest labour pool in the world. The view from companies and consultants is more constructive though, driven by a shift in government focus towards the ‘New Economy’. They use the analogy between a clunky, state-owned bank and a brand new private bank – which one is more likely to drive and take advantage of digital banking? Clearly the latter, since they are free of sunk capital in inefficient investments. The government uses renewable energy as a case in point – they are targeting solar rollout of 100GW over the next six years (constituting the largest increase globally), from an installed capacity of 3.3GW. They claim they are able to do this as they are relatively ‘nimble and reactive’ compared to Western economies, which already have large sunk interests

and infrastructures geared around fossil fuels. From our experience, Indian companies see technology disruption, emanating primarily from the US, as an opportunity. They argue that the innovation and disruption brought about in the late 1990s was a huge growth driver for India; it created the IT services industry from nothing, providing millions of jobs, whilst the second and third derivatives created wealth that had a higher relative impact on India than it did on the source of the innovation. This is reinforced by our research on economic complexity, a measure of the production capabilities of countries on which India scores favourably. In short, we believe India is well positioned both demographically and economically to benefit from technological advancements.

FTSE 100 Defensive Kick-Out Plan For advisers looking to preserve capital and still provide real returns for their clients, the current investment landscape is looking more challenging than ever. Low inflation, low interest rates and continued market volatility are creating even more bumps in the road. Our FTSE 100 Defensive Kick-Out Plan 32 will return 8.5% pa if the FTSE is above 90% of its starting level at anniversaries 3, 4, 5 and 6. So for more cautious investors seeking equity-like returns in a range of market conditions with an element of capital protection, the FTSE 100 Defensive Kick-Out Plan 32 could be the right way forward. Investing in this plan puts capital at risk.

Call our team on 020 7526 9216

STRATEGI S I NG YOU R EXIT March 2016

Strategising your exit What you need to know today to make the right decisions for tomorrow. Louise Jeffreys, Managing Director, Gunner & Co, shares he ideas in this second article of her three part series. Last month I shared with you a strategic framework in which to develop and grow your business, to build value and thus allow you to exit more lucratively. The earlier you define and implement growth plans, the quicker you build value into your business. Fast forward a couple of years; this month I’m focusing on the 6-12 months before you want to start the exit process (which in itself can take up to 18 months). Probably the question I get asked most often from my clients is this: What do buyers want? Which can also be loosely translated as “What do I need to do now, to get the best valuation for my business?” In reality, different buyers value different things. There is going to be a business out there that sees value in what you have built. I’ve been known to say IFA business brokerage is a lot

like romantic matchmaking. My main goal in working with clients is bringing businesses together that value the same things. That said, there are a few aspirations that come up time and again, and in this month’s article I am going to review some of those attributes.

Focus your attention on building, and growing your recurring income – this is the most important factor in valuation

1. Recurring income The importance of recurring income is number one on the list although it’s something not every advisory firm fully appreciates. It is likely that the majority of the valuation of your business will be based

on your ongoing, recurring fee/trail income. If you’ve built your business on the high-street, turned over £200k every year, of which £150k of that is initial fees, mortgage fees, general protection etc, at the point of selling your business you are likely to be disappointed. You may have earnt a good income from this business over the years, but transactional (oneoff income, as opposed to ongoing recurring income) is considered high risk, and as a result is not desirable in an acquisition. Focus your attention on building, and growing your recurring income – this is the most important factor in valuation. Most advisory firms care deeply about what happens to their clients following sale. It’s important therefore to find a buyer with similar values and approach, so that clients can enjoy continuity of service. Having a

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STRATEGI S I NG YOU R EXIT March 2016

strong client centric business model which builds trust and long term client loyalty is a real boost for evidencing strong recurring income. 2. Review your business model – and your charging structure When it comes to charges, most acquirers will place a greater value on businesses with an average charging structure of 0.5% of assets under management or advice than they will on those at 1%. Typically having a charging structure averaging below 1% and ideally below 0,75% across your client base is considered a good place to be. Most acquirers are not looking to purchase your business with the assumption it’ll deliver back to them what it’s been delivering to you all these years. It’s an investment after all, so the more growth potential they can see, the more they’re willing to pay. The question is however, if you are considering selling in 3-5 years, does it make sense to increase fees now (sensitively, in line with the value you’re delivering to your clients), build even greater value into your business assuming that norm may change. Without a crystal ball it’s a difficult one (particularly with the potential pressures

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of the likes of robo-advice). If it was me I’d probably look to carve out a couple of propositions, based on either size of investment or service levels, with a tiered charging structure. And then stay in touch with a broker like myself to keep track of changes in the market. 3. Attracting higher net worth clients Growing your average portfolio size per client also has a strong positive effect on business valuation. A fairly low number of HNW

Growing your average portfolio size per client also has a strong positive effect on business valuation individuals can often deliver as much income as several hundred mid-level investors, and should be easier to look after. That said, watch out for pockets of high-value clients. If the firm has 2 or 3 UHNW clients which significantly increase your average portfolio size across all your clients, buyers can be concerned of the risk of losing these and what that will mean

for the overall value of the business. 4. Get your back office systems in order Completing an acquisition is complicated and time consuming, It therefore makes sense that businesses with up to date back office systems, and electronic client records are easier for a buyer to integrate. This then has a positive effect on valuation. Factoring in the time and resources needed to integrate an acquisition can chip away at the price a buyer is willing to pay. Similarly, if they have to scan all your files following acquisition you can bet you’ll be the one paying for that in reality. Spend time in the months preceding your desired exit time getting all of your electronic records up to date. If you don’t have a backoffice system, ensure at least you have a clean, simple to understand spreadsheet with all your client data in one place. If you have data over multiple files and only you know where everything is it will be very difficult to hand this over. Similarly, if you have paper files, consider getting a student or temp in to scan either everything, or at least everything from the last 5 years.

STRATEGI S I NG YOU R EXIT March 2016

Finally, ensure that your clients are clearly segmented, so a buyer can see exactly which client is generating what revenue, and how. 5. Property matters It’s unusual for a buyer to want to retain the business premises when making an acquisition. Think about your exit timings around lease break dates, or at least understand the potential cost, and consider those factors in your ultimate valuation. If you have a clear timeline you may be able to renegotiate your lease in advance, or look at sub-let options and line up someone to take the space for the remainder of the term.

• Due diligence; Don’t skip things. Declare EVERYTHING as any skeletons in the closet will come out, and if you haven’t been up front this can kill the trust a buyer has in you and your business, and ultimately kill the deal. • Valuation; Be realistic. It’s good to know what you want,

Are there common pitfalls to avoid? Preparing ahead will help you to have a controlled exit, and avoid common pitfalls.

YOUR CLIENTS WANT TO SPEND IT NOW AND SAVE IT FOR LATER.

but being able to evidence the rationale of your valuation will put you in a much stronger negotiation position. It’s no good negotiating a value ‘because it’s what you want’. If you cannot articulate, with comparisons and evidence, why that valuation makes sense you will lose credibility at the negotiation table. • Consider all stakeholders; once you have a shortlist of potential buyers, think about how each one will work with your business including your team and your clients. Given almost all deals have ratchets in place if business is lost, finding the right fit for all parties is essential. Assuming you’ve got a team staying on, be very considered on how you get their buy-in. Spell out the benefits of the new structure and plan in detail

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the roll out of changes. Don’t leave anything to chance. • Don’t forget your day job; this is probably one of the most common pitfalls. The process of exiting can be long, complicated and timeconsuming. It is essential during this process you do not lose focus on the day to day running of your business. There is nothing worse than missing projections presented in the sale, because again the trust will be tested. If you can, spread the load between the acquisition process and operational business management within your leadership team to ensure you have the best chance of completing both effectively. Timeframes As you can see, a well prepared and controlled exit takes time, so start

early. Work backwards to set realistic timelines. Going from first introduction meeting to completion typically takes 18–24 months. Once you have started down the path of preparing the business for exit you can typically start getting introduction meetings going, since a number of the points above can be done during that 18-24 month time frame. Your starting point is finding a suitable broker to represent you. Gunner & Co. has the relevant M&A experience and through the relationship with IFA magazine has the reach into most buyers out there, significantly increasing your chance of introductions based on matched criteria, which ensure the best valuation. Next month I’ll share with you the different types of

exit options and buyers out there, which will help you even more in your planning process. In the meantime, if you are actively looking to exit now and would like to have a confidential, non-committal conversation I am always happy to share my insight.

Read Louise’s final article of this series in the April edition of IFA Magazine T: 07796 717346 E: louise.jeffreys@gunnerandco.com

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and Flexible Investment sectors where ‘income’ or ‘distribution’ was in the fund name. Funds in the IA Unclassiﬁed sector with a multi asset income remit were also included. The fund should only be considered as a long-term investment. As a result of the annual management charge for the income share class being taken from capital, the distributable income may be higher but the fund’s capital value may be eroded which will aﬀect future performance. The investment policies of Fidelity multi asset funds mean they invest mainly in units in collective investments schemes. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by FIL Investments International, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0116/8389/CSO7658/0416a2

GLOBAL BON D OUTLOOK March 2016

What’s the outlook for global bond markets in 2016? It looks like it could be a challenging year ahead for bond investors. Following December’s hike in US base rate, Jim Leaviss, Fund Manager, M&G Investments shares his thoughts on what lies ahead for global bond markets in 2016. A central bank policy member told me recently that “the least likely path of monetary policy is that priced in by bond markets”. The US interest rate futures market expects a gradual

pace of rate hikes towards 2% over the next couple of years. This policymaker’s view was that growth and inflation outcomes are likely to be binary. The inflation soft patch we are in now could be symptomatic of deep problems in the global economy, in which case, further monetary easing and unconventional policies will be needed. Or, if the recent wage developments are maintained, inflation could return to target sharply, and rates will need to rise

much more quickly than the market expects. We think it’s more likely that we have reached full capacity in many areas of the labour market in the US and UK, and that there is little value in their government bonds. If we’re right, and recent wage inflation is sustainable, then we should see inflation rates heading back above 1% in the developed economies. A return to Consumer Prices Index levels above central bank 2% targets will take longer, but with inflationlinked bonds pricing in persistent disinflation, we want to buy them. Insurance is a better buy when it’s cheap, and inflation protection is no different.

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Value in corporate bonds In corporate bonds, it’s hard to see why default rates should rise much from current levels. Fundamentals are slowly deteriorating, but outside of energy and commodity names, spreads appear to overcompensate investors for the credit risks they take. Liquidity risks remain high though, as the corporate bond market asset growth has been accompanied by a shrinking of the investment banks’ ability and willingness to hold bonds on their balance sheets. We believe investors need to be compensated for both credit and liquidity risk, and to run more in cash and liquid fixed income instruments than they might want to purely from an investment standpoint.

There are two significant supports in place for credit markets as we begin 2016. First of all, credit spreads in both investment grade (IG) corporate bonds and in

It’s hard to see why default rates should rise much from current levels high yield (HY) are likely to overcompensate for expected default rates (so hold-tomaturity credit investors are likely to outperform investments in government bonds); secondly, in a world of low or negative yields in government bonds, investor

demand for credit remains firm. In particular, we think there’s some excellent fundamental value in longdated US BBB rated bonds, where we can find spreads of 250-300 basis points over US Treasuries in companies we like (see figure 1). Figure 1: Long-dated BBB USD credit valuations remain attractive US investment grade underperformed in 2015 due to the weight of issuance there as companies anticipated the start of the Fed hiking cycle. As a result, the pickup in yield over European investment grade debt is now over 2% at the index level (see figure 2).

Figure One - Long-dated BBB Credit valuations remain attractive

400

0 1997

2015 USD BBB 15 year+ Index

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Average

GLOBAL BON D OUTLOOK March 2016

Figure 2: US versus Europe investment grade spreads While there is a perception that credit is expensive, it’s worth noting that over the past 20 or so years, global corporate bond spreads have been tighter than they are now 73% of the time and, after the widening in spreads we saw in August and September last year, my global bond strategy was to add credit risk, both in investment grade and high yield. This doesn’t mean that there aren’t challenges. A look at the challenges ahead We think a good portion of the ‘overcompensation’ that credit investors get for investing in the asset class isn’t about credit risk, but liquidity risk. There were a

couple of days in 2015 when credit markets all but closed down as risk appetite

Managing liquidity risk in a portfolio is equally as important as choosing the companies you lend to disappeared. Managing liquidity risk in a portfolio is equally as important as choosing the companies you lend to: this might mean running with more cash or government bonds than you might like ideally, it might mean avoiding smaller or complex bond issues, and the use of credit default swap

(CDS) indices is important as an extremely liquid way of adding or removing credit risk from a fund. Other challenges relate to increasingly poor behaviour from corporate bond issuers. For example, bond investors don’t like debt-financed merger and acquisition (M&A) that results in ratings downgrades, or bonds being issued to do share buybacks (or to buy the business owner a third yacht). This kind of issuance is coming back to the market, and corporate leverage is edging up. So the tailwinds of improving corporate fundamentals are no longer with us, and there’s also been a pick-up in idiosyncratic risk (the VW emissions scandal, for example, which saw its 10-year

Figure Two - US v Europe investment grade spreads

2.5

0 0

-1 2005

2015 US Investment Grade

EU Investment Grade

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bonds fall by around 10%) and a sector-specific pummelling: high yield energy bonds have seriously underperformed as the oil price collapsed, with many bonds now priced at distressed levels (commodity names, like Glencore, suffered as well). Defaults will pick up from the 2.5% global high yield annual rate, but with high yield spreads at 6% over government bonds, there is room for the asset class to outperform. Other regions Elsewhere, the sell-off in emerging market (EM) debt and currencies looks to be the biggest valuation opportunity in global fixed income. Significant risks remain, however, both from the continued slowdown in

T he full version of Jim Leaviss’ Global Bond Market Outlook 2016 (published 1 December 2015) may be found at https:// www.bondvigilantes.com/ blog/panoramic-outlook/ global-bond-marketoutlook-2016/

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global trade, but also from domestic politics and fiscal deterioration. We’ve closed out our EM short positions, but are not yet ready to be fully bullish on the asset class. Finally, the dollar tends to

With high yield spreads at 6% over government bonds, there is room for the asset class to outperform do well until the Fed starts its hiking cycle, which of course has now commenced with the central bank’s confirmation of a 0.25% rate increase in December. While the strengthening of

the US currency is relatively modest compared to some of its previous bull cycles, and we expect it to continue to outperform as the great ‘divergence’ continues, on some fundamental valuations, and taking into account heavy investor positioning in it, the upside potential is not as great as it was. The divergence theme, whereby further US rate rises can be expected while in the eurozone, Japan and certain emerging economies, more monetary stimulus rather than less is likely, should remain a key macro consideration for global bond markets in the upcoming year.

About Jim Leaviss Jim Leaviss is Head of Retail Fixed Interest for M&G’s mutual fund range. He joined M&G in 1997 after five years at the Bank of England. As well as heading up the team, Jim is the fund manager of the M&G Global Macro Bond Fund and the M&G European Inflation Linked Corporate Bond Fund. He is also deputy manager of the M&G Gilt and Fixed Interest Income Fund, the M&G Index-Linked Bond Fund and the M&G UK Inflation Linked Corporate Bond Fund.

WI LL CH I NA TU R N? March 2016

Will China turn? Is it just the halving of Chinese share prices that the world needs to deal with, asks Michael Wilson? Or is the world waiting for deeper wisdom? You need the fingers of both hands to count the travails that the world’s financial markets have been having to cope with since the end of December. There’s been the slowing of the US economy at the start of an election year – always a time for sitting on the fence as far as fund managers are concerned. There’s been the weakness of the Eurozone recovery, and the persistent possibility that Britain could vote itself out of the EU by Christmas. There’s been the Federal Reserve’s error in raising US interest rates, and the rise and rise of cyclically adjusted p/e valuations.

Two monsters But none of these can compare with the two monstrous threats that have been keeping the analysts awake at night. One, of course, has been the crashing price of oil, which has seen Brent dropping below $30 as Russia (reportedly) agrees to limit production in line with OPEC. And then there’s the mess in China, where the Shanghai

Composite had dropped back to a 16-month low by the first week of February. Having thus halved in value since its June 2015 peak, and having also trashed the hopes of a billion investors who’d been hoping that the People’s Republic might finally be open for investment business. So which of these two monsters is likely to turn first? The oil price or the Chinese market? Well, there are wellinformed oil analysts who insist that we won’t be seeing $40 oil any time this year. Global production is only 3% above global consumption, at best, but every oil tank in the world is currently full to capacity, and tankers

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are literally being used as overflow containers. Not even a market as forward-geared and derivative-driven as oil can expect to stage the kind of tipping-point reversal that we’re looking for. A failure of leadership But China’s problems have been in a different league this year, because the worry has been that the market itself isn’t grown up enough to cope with the expectations of the Western world. An overstatement, surely? Well, take what happened in the Shanghai exchange during early January. The automatic trading shutters came down no less than three times in eight days early after intraday falls of more than 7% and, on the second occasion, Thursday 8th January, the entire day’s trading had lasted just 14 minutes. But the volatility went on. By the end of the week, the Shanghai Composite had lost a crashing

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15% on the year. And by early February the YTD losses were up to 25%. Let’s not be in any doubt about the relative health of the underlying Chinese economy itself. At a claimed 7% (but see

There are well-informed oil analysts who insist that we won’t be seeing $40 oil any time this year

below), it’s still forging ahead of every other country on earth. But, as Western China fund investors will need no

reminding, the disconnect between economic growth and stock market performance is a matter of record. Instead, what has really rattled the international markets this year is that the Beijing authorities have been quite amazingly clumsy in their responses to January’s problems. From officially banning large operators from selling into the January rout, right through to ordering the nation’s banks to pump liquidity into the system until they could give no more (and then giving up and letting the markets simply implode), Beijing’s regulators are showing that they’re better at firefighting than at fire prevention. And when the water runs out, as it did in January, there’s been no other option but to stand back and let the flames rip. The reputational damage has probably been worse than the financial troubles it has caused.

WI LL CH I NA TU R N? March 2016

“If you do not change direction, you may end up where you are heading”

(Lao Tzu)

Are the bears loose? So yes, as we’ve said, serious questions are currently being asked about the competence of the Chinese regulators – and, more seriously, about their credibility. That’s an issue that isn’t likely to disappear in the blink of a speculator’s eye, like a smallish global oil glut. There’s something institutionally amiss here. Not all of these questions are really fair. After all, most serious emerging market investors are tough enough to be able to look a 30% fall in the eye and say: “Well yes, that looks bad, but actually this is how it goes with illiquid systems.” But this time the ninemonth loss is nearing 50%. The bigger worry, for a global investor, is that the China problem has highlighted a self-deception that the rest of the world has been hanging on to. The problem, say the pessimists, is that we’ve been relying too much on China’s economic surge to cover up the gaps that have been occurring in Europe, in Japan, and now, it seems, in the

United States. China’s crisis has knocked away a crutch on which many Westerners had been rather depending. And yes, that’s a problem that goes beyond China itself. A currency slide? What are the knock-on effects of the China shock likely to be? The immediate worry being expressed in the West is that Shanghai’s sudden fall from grace is likely to cause a slide in the value of the renminbi, which will have to work harder from now on if it’s to attract foreign specu….

Chinese exporters while also making it harder for Chinese borrowers to repay their dollar-denominated debts. Secondly, it would make China’s products cheaper for Western consumers, which could force the rest of the world into a currency war (“competitive devaluation”) and which would effectively export China’s deflationary pressures to all and sundry. Thirdly, the prospect of cheaper wage levels in China would compound recent alarm about the “offshoring” of US manufacturing jobs to mainland China, which was just starting to ebb away as the renminbi rose. No wonder Donald Trump wants to slap a 45% levy on Chinese imports….

Most serious emerging market investors are tough enough to be able to look a 30% fall in the eye and say: “Well A catalogue of errors yes, that looks bad, but Shanghai’s response to the stock market crises of actually this is how it goes the last year has been less with illiquid systems.” oops, we mean investors. It would also undermine recent assurances from President Xi Jinping that China saw no reason to let the renminbi slide back. A currency slide in turn would have a twofold effect. Firstly, it would reduce China’s ability to buy foreign goods, which would be bad for non-

than wholly impressive. When last summer’s plunge happened, Beijing’s first action was to order the partially state-run banks to pump in a quarter of a billion dollars’ worth of liquidity, apparently in an attempt to outrun the combined weight of the foreign markets. Unsurprisingly it didn’t work and had to be quickly abandoned. If the authorities had been

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a little quicker to introduce a circuit-breaker in June 2015, they might have limited the damage. However, the circuitbreaker came in only on 4th January 2016, in two levels: • A 15 minute trading suspension if a one-day fall reached 5% • A full closure for the day if the drop reached 7%. It says everything that the circuit breaker was invoked three times in eight days. All this sent the currency diving beyond what the central bank could hope to repair. Which was embarrassing, since the central bank had spent December shedding $108bn of China’s precious foreign currency reserves in an attempt to prop it up. The support programme had been exposed as a belated, ineffective and rather undignified fiasco. The regulator also gave a startling series of mixed messages on whether or not it would end last June’s ban on sell-offs by large shareholders, which was supposed to have expired on 1st January. First it said it would, then it wouldn’t, then it would, and finally it wouldn’t. The market was calmed but hardly reassured. So what are the real chances that a Shanghai slump could send China itself into a

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tailspin? Not great, on the face of it. For one thing, as we’ve said, there is virtually no historical correlation between Chinese stock values and economic growth. But equally importantly, anyone who thinks the China A shares market is dominated by nervy foreign investors is well wide of the actuality. We’ll agree that the 2014 Hong Kong Connect programme has widened the scope for foreign investors to obtain exposure to the local Chinese markets, but the overwhelming majority of Shanghai shares are still owned by Chinese nationals or institutions. Dark statistics Meanwhile, though, genuine worries persist about the reliability of China’s statistics. Is the Chinese economy really growing at 7.1%, as Beijing insists? One London-based study tried recently to get an insight by measuring the growth in China’s known demands – for commodities such as electricity, which it thought might be a reasonable proxy for true economic growth. But its calculations produced a miserable 2.4% for GDP. Another concern is that a lot of the money going into China’s growth is being funnelled through the

country’s major banks, which Beijing keeps on a famously short leash. A widespread pattern of off-balance-sheet loans means that nonperforming debt is impossible to measure properly. But UBS Bank has estimated that average non-performing loan levels might well reach 4.5% - nearly five times the official NPL figure. But economic change is undeniable On the positive side, it’s a matter of public record, however, that China’s economy has turned a corner away from hefty foreign investment and toward consolidation. The new economic plan of autumn 2014 amounted to a clampdown on credit – not before time, since China’s per capita debt-to-GDP ratio is now reckoned to be up there with Japan. China is said to have poured more cement and concrete between 2011 and 2013 than the US did during the whole of the 20th century. But the roads have now been built and the airports are in operation, and the hefty infrastructural spending spree is at an end. That’s a solid fact that Western commodity suppliers and their investors somehow didn’t see coming. And if we didn’t see coming, maybe that was our own fault?

R ICHAR D HARVEY March 2016

Do ethical investments pay? What’s evil these days? Richard Harvey isn’t as sure as he used to be Would you invest in a business which made cigarettes, and marketed feverishly in Third World countries to gain a new generation of nicotine addicts? Or maybe an arms manufacturer, making loadsawonga out of nasty conflicts in the Middle East? That little man with the horns, pointy tail and trident who scampers around my conscience, whispers: “What do you care sunshine? Fags and guns equal good returns. Where are you getting those nowadays?” Happily, evidence is emerging that those who focus on ethical investments might reap a double reward - not just a cosy glow they are steering clear of funding global iniquity, but also by earning tasty returns. Towards the end of my career as a professional publicist, I helped several

clients reap the benefits of adopting a corporate social responsibility policy, ensuring their businesses behaved in a way which recognised their environmental and social responsibilities alongside the need for profits. For some, it was a modest programme, ranging from promoting waste management

and car sharing schemes to supporting local charities.

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R ICHAR D HARVEY March 2016

There was, however, one hard-nosed statistic which helped them sign up to CSR - that many of the brightest young men and women emerging from universities were adamant they would only work for companies with a clear ethical approach. Mark you, one man’s ethics is another woman’s sin. Take, for instance, the B Corporation movement, a worldwide network of more than 1,000 businesses committed to using commercial practice to benefit society, which includes Ben & Jerry’s ice cream among its members. Nobody is a bigger fan of Ben & Jerry’s than me, notwithstanding their predilection for coming up with weird flavour

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combinations. Even the design of their ice cream tubs is intended to convey the impression they are a decent bunch of people,

A package of ethical investments could appeal to many clients doing their bit to promote global harmony. However, with sugar and fat now considered demonic, and more than 60 percent of the UK population deemed overly-plump, there may be some who could question how investing in a purveyor of ice cream - no matter how delish the product - fits with an ‘ethical’ strategy In an overview of ethical investments, John Spiers, late of Bestinvest and now chief executive of EQ Investors, says: “The ultimate solution will be for it to become apparent that strong financial returns are directly linked

to excellent standards of corporate governance. “It’s early days, but there are a few encouraging straws in the wind. The Impact Investing Benchmark, developed by Cambridge Associates, and the Global Impact Investing Network has been created to analyse the relative performance of investing in companies that are trying to do good, and it appears to be positive.” His use of the word ‘straws’ seems particularly apt, because we’re all clutching at those at the moment. The slowdown in China, and its knock-on effects for the world economy, would appear to pre-empt any potential upside for savers from an increase in interest rates, if, as and when it ever materialises. Nevertheless, a package of ethical investments could appeal to many clients, particularly those of an advanced vintage, who will be increasingly aware of the need for ‘good deeds’ collateral when it comes to negotiating with St Peter at the Pearly Gates.

COM PLIANCE DOCTOR March 2016

Just how do they do it? New FCA study seeks to understand whether competition is working effectively to enable both institutional and retail investors to get value for money from asset management services. Compliance Consultant Lee Werrell investigates On 18 November 2015 the FCA published its terms of reference (TOR) for their competition market study on the asset management industry, a regulatory first of considering competition relating to the asset management market. The TOR marks the beginning of a year-long process through which the FCA will be holding various roundtables, bilateral meetings and distribute requests for information and data about asset managers’ businesses. The TOR sets out three main questions relating to the market study: 1. How do asset managers compete to deliver value? 2. Are asset managers willing and able to control costs and quality along the value chain? 3. How do investment consultants affect competition for institutional asset management? In addressing these three questions, the FCA will in addition determine if there are actually any barriers to innovation and technological advances. The FCA has broadened the scope to include institutional investors together with retail. This may appear to be because of the fact that issues identified in the feedback

to the Wholesale sector competition review of 201415 applied both to retail and institutional investors. What are asset managers going to be doing? Asset Managers really need to get to grips with all the issues highlighted inside the TOR areas concerned quickly and need to ascertain the potential impact of the TOR to their businesses. Asset Managers will probably need to carefully consider the best way to provide answers to the FCA requests for information, as the FCA has indicated that they have started gathering information from stakeholders. This will likely include transaction and asset data, market and marketing information, views from asset managers, platforms and investment consultants, as well as their clients. The requests are lengthy and detailed, investigating issues which can include costs and profitability, and turnaround times for submitting responses could possibly be tight. The entire process of collating and compiling the required information might be timeconsuming and it’s probably going to be beneficial to start planning on the best way to resource initial and subsequent requests sooner rather than later. Understanding the data being

provided prior to it being submitted can also be critical. Regardless of whether managers think that the FCA will request information, whether by means of a questionnaire or otherwise, the asset managers will likely need to consider whether it’s in their own interests in making representations or supply evidence voluntarily. IFAs can leverage this data and the whole exercise by requesting additional material from the asset managers when they know the interim findings from the regulator. The regulator considers that the benefits to consumers of more effective competition typically include lower prices, better quality products and services, useful innovation and genuine choice. The FCA consider that a wide selection of end investors with pension funds, long-term savings and retail investments could benefit from improvements in competition within this sector: • 14.2 million pension savers could benefit from improvements in competition for institutional investors (DWP Family Resources Survey, United Kingdom 2013/14, June 2015) • 11 million retail investors could benefit from improvements in competition

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at the retail level (FCA (2013) Consumer Spotlight www.fcaconsumer-spotlight.org.uk/ consumer-spotlight). Are you acting with integrity? The somewhat quiet passing of the final notice at the end of the summer months in 2015 belies the fact that it has got some significant ramifications for IFAs, wealth and fund managers. In reality all Approved Persons will likely be subject to the findings which offers further clarity on the Fit & Proper regime, ahead of moving across to the Senior Mangers & Certification Regimes, planned for 2018. Following on from the ARM bonds mis-sale by Catalyst Investment Group Limited in 2013, the FCA imposed a monetary penalty of £50,000 for failure to comply with Statement of Principle 6 of the Authority’s Statements of Principle for Approved Persons on Mr Andrew Wilkins. This was after an appeal to the Upper Tribunal, the meaning and proper application of the FCA’s Fit and Proper test

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for Approved Persons was considered at length among the Tax & Chancery Chamber, which includes a particular focus on the integrity component of this test. What occurred? Mr Wilkins was the Head of Corporate Finance at Catalyst Investment Group Limited (“Catalyst”), the principal distributor of ARM bonds throughout the uk. ARM bonds are structured products issued by a Luxembourg entity.

All Approved Persons will likely be subject to the findings which offers further clarity on the Fit & Proper regime There was clearly a breach of APER in 2013 when the FCA discovered that Mr Wilkins had apparently failed to act with due skill, care and diligence in managing Catalyst’s business, and thereby breached Statement of Principle 6 of APER in the following respects:

He permitted Catalyst to continue in promoting bonds to be issued by ARM and arranged for further acceptance of funds from investors, after he had become informed that the Commission de Surveillance du Secteur Financier (CSSF) had requested that ARM not issue any additional bonds, pending a final decision on its application to obtain a licence. Mr Wilkins then proceeded to approve a letter mailed to IFAs which presented an unfair and misleading picture of ARM’s regulatory position, an apparently flagrant further breach of the code. Mr Wilkins also neglected to take reasonable steps all through the relevant period to share with Catalyst’s compliance officer, Alison Moran, that ARM considered it had become required to have a CSSF licence. Alison Moran was fined £20,000. Initially the FCA also found that Mr Wilkins failed to act with the correct standard of fitness and propriety during the relevant period, as he did not amend Catalyst’s financial promotions to give a clear, fair and not misleading

COM PLIANCE DOCTOR March 2016

picture of the Swiss firm’s regulatory position and of the regulatory risk regarding ARM and the ARM bonds. On Appeal, Mr Wilkins successfully challenged the decision in the Upper Tribunal, which considered several of his actions including the fact that he sought legal advice and raised questions with the compliance officer. Importantly, the Tribunal were convinced that he showed a significant concern for the safety of pending investors’ funds and therefore his general outlook was genuinely positive; he didn’t “close his mind to the obvious” or act recklessly. This apparently explained why he did not anticipate needing to publish information saying otherwise although his supervisor had heavily influenced him during the time. Consequently, the tribunal held that Mr Wilkins had not breached the FIT requirements. The actual end result was not an entire exoneration or overturn of the original decision by the FCA as the

Tribunal then agreed together with the regulator that Mr Wilkins had definitely acted without due skill, care and diligence. This reflects the misconduct admitted by Mr Wilkins, however, the Tribunal did reject the FCA’s argument that Mr Wilkins had acted recklessly and without integrity. The Tribunal then directed the FCA to scale back the financial penalty to £50,000 and which they did and additionally decided against imposing a Prohibition Order on Mr Wilkins. Lessons learned This clearly demonstrates the absolute willingness of the Upper Tribunal to re-examine factual evidence and also to take into account positive factors of the individual’s conduct in reviewing the severity of the penalty, giving some comfort for individuals in the financial services sector. The Tribunal stated in paragraph 47 of the judgement that “the meaning of the expression “integrity” is elusive” but it goes on to explore various

behaviours which should form much of the composite elements of any decision about whether a person meets required standards of fitness and probity on grounds of integrity. These behaviours were regarded as being; • Honesty (e.g. moral soundness, rectitude and steady adherence to an ethical code); • An absence of reckless behaviour; Candid and truthful dealings with the regulatory body; and • A willingness to comply with the regulatory standards and system in general. • Lessons to be heeded by all approved persons. If you need advice on dealing with the regulator, enforcement action or responding to a request for information from them, please contact us for guidance. Proper and accurate responses are key to maintaining a good relationship, no matter how it first appears.

Market Study MS15/2.1 November 2015

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SOAP BOX March 2016

FCA: Uneasy lies the head Watch your back, Mr Bailey, says Michael Wilson

And they wonder why people call it a poisoned chalice? As Andrew Bailey, the newlyappointed chief executive of the Financial Conduct Authority (FCA), gets settled behind his desk and decides where to put the waste paper bin, we have a cautionary thought for him. Uneasy lies the head that wears this particular crown. Beware the soothsayers.

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Okay, maybe I’ve been watching too much David Starkey on the telly lately. For those who missed it, Starkey’s series presents a startlingly gripping account of how the fates of successive medieval rulers invariably depended on who happened to be in all the other top jobs, and how a particular battle happened to go, and whether or not there happened to be a plague

going on, and so forth. And the result of all this could decide whether you got beatified or butchered. Psssst, you know who... Previous CEOs at both the FCA and the Bank of England have had their share of both fates, although the assassinated are probably in the majority. But there are threads in the story of Mr Bailey’s recent

SOAP BOX March 2016

appointment to the FCA that point toward some dark political manipulation – not by the medieval kings of Spain or France this time, but by somebody much nearer to home. There are threads that suggest a near-obsession with protecting the embattled reputation and the culture of Britain’s senior bankers. There have also been explicit warnings from on high that, if we lean too hard on our own financial elite, they might decide to decamp to some foreign tax base and destroy our status as the financial headquarters of Europe. But let’s start at the beginning. You won’t have missed the fact that Tracey McDermott, the interim head of the FCA since last July, had unexpectedly declared her unwillingness to take on the FCA role in any permanent way. A decision that may have

been connected with the fact that she was being slammed by a parliamentary committee for allegedly going soft on the banking industry, and that she didn’t appreciate it very much. Shifting alliances Ms McDermott, then, had been caught backing the cavaliers instead of the parliamentary roundheads, who were right behind the Vickers Commission and who wanted to see a few bankers being publicly hung, drawn and quartered. Whereas her ultimate boss, George Osborne, was fighting his way back from Brussels, or maybe Davos, with a renewed hatred of all those heretics who questioned the conduct of the financial establishment in London. Now, Ms McDermott might have winced at the thought of a parliamentary grilling, but she was nobody’s wimp. She had already earned a striking

reputation in the City as a toughie who had imposed massive fines on banks during the Libor scandal, and in theory she should have had nothing to fear from Andrew Tyrie, the chairman of the Treasury select committee, who was leading the inquiry. But, in some ways, that was exactly the problem. Ms McDermott’s crime had been to call off an FCA investigation into ‘cultural standards’ in the City – most notably, with regard to bankers. And although that will have delighted the Chancellor, it had left her at loggerheads with those Treasury experts who were slavering for the very same inquiry. Voices from the dungeon But there’s more. According to feverish speculation in the press – both the Guardian and the Telegraph, to keep it politically balanced – Ms

“Uneasy lies the head that wears a crown” - William Shakespeare, King Henry IV

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SOAP BOX March 2016

McDermott’s signature on the parchment may have been forced by the steely grip of the enforcement squad from the Bank of England, who had been drafted into the FCA in substantial numbers during recent months. And all of whom appeared to agree with the Chancellor that looking too closely at the banks would be a Thoroughly Bad Career Move. So what so we know about Mr Bailey? Firstly, that he had never even applied for the post, but had been strongarmed into it by Chancellor George – who said he was “the most respected, most experienced and most qualified person in the world to do the job”. Secondly, that he was moving over from his position as head of the Bank of England’s Prudential Regulation Authority – the FCA’s twin brother which

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oversees the financial institutions rather than the public with which they interact. Crucially, of course, he will now retain his seat on the PRA board.

Ms McDermott’s signature on the parchment may have been forced by the steely grip of the enforcement squad from the Bank of England Political rats in abundance, to judge by the Commons Treasury select committee’s response. We couldn’t possibly comment. But let’s take a leaf from David Starkey and do a little more historical research of our own. The glorious and the dead There was Hector Sants, chief exec at the former

FSA, who was hurriedly brought in in 2007 to sort out the ‘soft-touch’ regulatory slackness that showed up so tragically after the 2008 financial crisis, and who quickly turned his attention to sharpening up the regulatory system in a process that culminated with the Mortgage Marketing Review and Retail Distribution Review. All in all, a good job well done, some of us would probably say – except that Sants also cluttered up the system with such an endless torrent of nit-picky regulations that neither the clients nor the advisers could really keep up with it all. By the times Mr Sants left in 2012, there were people declaring that the old FSA had becoming a self-serving and self-referential machine that served no useful purpose.

SOAP BOX March 2016

Knight in shining armour Enter, then, the new challenger, Martin Wheatley, who lost no time in declaring that he wanted the newlyfounded FCA to run a principles-based regulatory system – one which ordinary people could understand, and one where the exact wording of every document was less important than its meaning. Here at IFA Magazine we noticed the effect of Wheatley’s arrival pretty quickly. The endless policy statements gave way to a lot of rather woolly ‘thematic reviews’, and parts of the regulator’s website became downright folksy. Which was appropriate in its way, because quite a lot of Wheatley’s time

was spent on controlling the payday lenders and knocking the devious loopholes and backdoors out of every corner of the system. It looked like soft consumery stuff. But Wheatley also had the tougher job of bringing UK regulatory practice into line with the European MiFID project – a giant and rather cumbersome attempt to enforce uniform

minimum standards of consumer protection right across the greater European financial space. It was a job that needed doing, but there was a problem.

Wheatley’s time was spent on controlling the payday lenders and knocking the devious loopholes and backdoors out of every corner of the system Damned foreigners The problem was that Europe was a bit of a dirty word at number eleven. From the proposed uniform levy on financial services, through to controls on bankers’ bonuses and on to the (once-proposed) abolition of execution-only services for the hoi polloi, George had his back to the wall, and it showed. For the last four years or so, no financial disagreement with Brussels has been too small to be considered an official slight to Britain’s financial sovereignty, or as a threat to London’s undisputed role as the banking centre of Europe. The Chancellor is a teensy bit prickly about banking regulation. There, we’ve said it. Meanwhile, over at the Bank of England... And then there’s been the Bank of England itself. Now, one of the things it’s easy to forget about the BoE is that since 1997 it’s been technically independent from the government - and from the Treasury in particular. Which is why it seems notable that Chancellor Osborne has, indeed, forgotten that point. We could probably argue about whether it was the

accursed independence of the BoE or the equally accursed world stock market correction of 2000 that did for the credibility of the separation doctrine. But it didn’t do a lot of favours for Steady Eddie George (governor from 1993 to 2003) – or for Mervyn King (2003 to 2013), who copped most of the flak for the loose policies of the early noughties. What we can definitely say is that King managed to get right up George Osborne’s nose. King into checkmate This turbulent priest repeatedly had the nerve to query the government’s economic policy in ways that the Treasury (rightly or wrongly) regarded as political back-chat. And King also argued openly for breaking up some of the bigger institutions: he had famously opined that, unless the Bank was given more interventionist powers to ensure financial stability, it would be like a church – “able to do no more than issue sermons or organise burials.” No wonder the Chancellor didn’t take to him very well. And no wonder that King’s replacement, the Canadian Mark Carney, hasn’t been so keen to make waves, or political enemies. But is there a connection between Carney’s more compliant line and the newly assertive role that the Bank of England seems to be taking in the regulatory field? Or is it simply that Carney’s job (basically, do nothing but keep talking) is less challenging than anything King ever faced? That’s a question that we’ll have to leave open until Mr Bailey and his accomplices have had time to settle in. Good luck, Andrew, and don’t forget the stab-proof vest.

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