What's Coming Up for Investors This Year?

Holly Black: Welcome to Morningstar. I'm Holly Black. with me is Andy Pettit. He is director of Policy Research at Morningstar. Hello.

Andy Pettit: Hello, Holly.

Black: So, Andy, you're looking at all things policy and regulation for the year ahead. That might not sound too exciting to some people, but actually with Brexit and ESG and Covid, there's plenty going on. Where should we start?

Pettit: I would start with ESG, I think. It's been a big topic and it's continuing to get bigger from three perspectives really. One is making sure that investment managers consider ESG factors in their decisions. Secondly, that they tell investors about that – what they're doing, how they're doing, are they achieving the goals they set out? And thirdly, at an advisor level, making sure that they start to factor in these discussions with their clients.

Black: So, we know that investors have been getting far more interested in ESG and sustainable investing matters. Do you think this will further that trend if there's some regulation behind that?

Pettit: Yes, definitely. I think there is a push pull. So, one is making sure that greenwashing doesn't get prevalent, so with people overexaggerating their claims, but also with so much general news from Extinction Rebellion, Greta Thunberg and so on, there's a natural growing interest in it.

Black: Okay. And what is the second area you've been looking at?

Pettit: One of my favorites, the value assessments that the FCA introduced upon investment managers last year whereby the manager basically has to put themselves into the shoes of their investors and tell them how the fund has done, whether that's good, bad, or indifferent. So, it was a great success story in that we saw fees start to be reduced, we saw some funds closed or merged and we saw a lot of investors move to cheaper share classes.

So, we're just entering round two of that. It'd be interesting to see whether there's more of the same, whether some of the funds that were put on watch because they haven't performed particularly well have kind of come out of the naughty list, and whether the reports themselves start to become a little bit more engaging for investors.

Black: And I think what's really great there is you and I have spoken before and we were worried it was going to be a tick box exercise, but it does seem that companies are actually taking it seriously. What is our third area of regulation for the year?

Pettit: That's the old one now of liquidity. So, obviously, in the spotlight since Woodford a couple of years ago and resurrected last year with property funds starting to close during the pandemic. So, regulators continuing to look at how managers can better match their liquidity requirements with the securities that they're holding and I think we can expect to see some proposals for a new fund type that is better suited to holding some of these more illiquid securities.

Black: So, I think investors might be surprised that's still dragging on as the Woodford debacle was a couple of years ago now. So, do you think we'll finally see a resolution on that?

Pettit: I think we'll see steps towards it. Actually, I think the problem is probably not too prevalent, but it's obviously a big issue for the funds that it does affect. So, it's a bit difficult balancing act and to use this framework generally it has done a pretty good job over many years of managing and keeping those elements to a small proportion of a fund.

Black: Okay. And what's next on our policy to-do list?

Pettit: Well, the four is the advice area. So, the FCA are kind of two-thirds of the way through a review of how the consumer investment market works with a review of the Retail Distribution Review last year and the financial advice market review. And I think they're finding so far that those various steps have improved the market, but things haven't got better quickly enough if you like. So, I think they continue to want to be able to get more people taking advice, being confident that there is good advice, having a low risk of getting scammed and ultimately moving more of their savings into investments.

Black: Okay. And what's the final area you're looking at for 2021?

Pettit: That is the kind of broad area of taxation and kind of linked to your earlier point about the pandemic recovery. So, finding a balancing act between bringing more money back into the government coffers but not stifling the economy at the same time. So, we've seen the first phase of a review of capital gains tax, mooting of a wealth tax. So, I think a lot more work to do, but definitely an area that's under investigation.

Black: And investors probably feel quite worried when they hear tax reviews. Should they be scared?

Pettit: I think they just need to keep an eye out and see what the direction of travel is and whether there are things that they should be doing to mitigate any future changes at an early stage.

Black: Andy, thank you so much for your time. For Morningstar, I'm Holly Black.