Securing the Future of the Funds Industry

(Picture: Mark Crathern, Head of NatWest Trustee and Depositary Services)

The role of tokenisation

To many investors, ‘tokenisation’ is simply a byword for digital currencies and the highly uneven and unpredictable returns associated with them. But for the funds industry, the term has a different meaning. “Tokenisation is a digital representation of something, so we are having industry buy-in to the digital representation of a fund itself and [eventually]… tokenisation of the underlying investment,” explained Edward Glynn, Managing Director and Head of Global Markets at Calastone.

This trend, which Edward dubs the ‘Amazon-isation’ of the asset management industry, has deep implications for how the sector is regulated, the changing expectations of investors and, importantly, the advantages of collaboration delivering digital investment solutions.

Pointing out that a decade ago the average cost of routing and settlement for a mutual fund order in the US was $0.18, compared with €100 in Europe, the need for greater tokenisation in the supply chain is obvious. Edward continued: “Ultimately if we don’t get the tech right, all of us in this room will keep losing out because we are paying so much in unnecessary fees and costs.”

Tokenisation could ultimately do for retail investors what institutions already enjoy: a single management account allowing end users to invest in such things as fractions of shares, or even fractions of real estate assets.

But the question is how the industry may move towards such an advance. For Michael Dowds, Interim Head of Digital, Innovation and Design at RBS International, being resolute in funding innovation and not waiting for the regulator to pre-approve an approach is vital. “Yes, the regulatory clarity isn’t 100% there yet, but at the same time you can’t sit back and wait for that to happen… It’s very common for lots of financial institutions to have an innovation team when times are good, but when times are rocky the funding gets cut. That’s a mistake. If you really believe in this future, you have to invest through the good times and the bad.”

(Picture left to right: Leigh Himsworth - Fidelity, Maria Municchi - M&G Investments, Nalaka De Silva - abrdn)

Regulators and industry need to keep pace with the speed of innovation

As retail becomes the natural evolution for adoption of digital approaches, education is something that Michael believes asset managers should dirty their hands with. But the surprising focus for this isn’t just in targeting the knowledge blind spots among end investors. Justin Urquhart Stewart, who was hosting the event, was keen to ask whether regulators are keeping up with the pace of innovation, and what education they may need.

For Edward, the signs are positive: “One of the reasons that the UK is embracing digital investments, tokenised funds and everything in this space is because of collaboration over the past couple of years between the FCA, the Treasury and industry… There are a whole load of initiatives to ensure that the UK is forefront of the evolution.”  

But technological innovation is just one area where the industry needs to address education. In a session devoted to the role of private markets, Jagdip Gujral, Legal Director, Private Funds Group, Addleshaw Goddard pointed out that investors need to understand upfront the unique nature of assets sold in that unique market, especially around liquidity and redemption, and markedly in contrast to UCITs.

“The investment returns of these private markets are long-term and you may have to be in there for seven to 10 years…”, he said. With different funding frequencies, private market providers typically charge upward of 1.5% per year of the amounts committed to the fund and take 20% of the profits - something investors may not readily recognise. “Given the completely different structure and terms, there’s definitely an education piece.” 

Regulation and the spectre of consumer duty

If the onus on educating clients risked calling for the return of the caveat emptor (buyer beware) philosophy, thoughts around Consumer Duty (CD) did quite the opposite. The obligation to act in the clients’ interests first has been a cornerstone of the FCA’s approach to protecting retail investors since the summer of 2023. With many pondering the finer points of alignment between CD and other regulations such as Assessment Values, a year on, what have we learnt?

For a start, CD is still being cooked. Peter Capper, Senior Advisor, International Fund Regulation at the Investment Association said: “Consumer Duty was never going to be done last year. I think we all saw that as the first step and it’s going to be an ongoing process… It’s quite difficult to understand what’s needed and I think the FCA wants to see what the industry does with it… Our sense is that they will go after the egregious wrong-doers… rather than those who have not quite got there yet.” 

An ask for the industry

With thoughts of how the industry may be shaped in the years to come pertinent to the UK's position in the industry, Mark Crathern, Head of NatWest Trustee and Depositary Services, made an appeal to the industry: “On education, my plea to clients, intermediaries and our competitors is, ‘Can we come together and make a step change that’s going to help the UK and the European funds sector?’”

“If we continue to do it in isolation and at different paces, worrying about the marginal attrition that we’re all exposed to, we’re going to struggle and see people being protectionist rather than proactive for a better outcome.”

If change is inevitable, adapting to it would appear to be a collective choice, industry wide. And the sentiment from the conference shows a strong desire and commitment to embrace this change for the benefit of all investors. 

If you’d like to talk about any of the topics discussed at the conference and how they might impact your organisation in the future, please contact your relationship team.

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