Where shall we start?“I do not apologise for being correctly quoted as saying that while the financial servicesindustry performs many economically vital functions, and will continue to play a largeand important role in London’s economy, some financial activities which proliferatedover the last ten years were ‘socially useless’, and some parts of the system wereswollen beyond their optimal size.“not all financial innovation is valuable, not all trading plays a useful role, and that abigger financial system is not necessarily a better one.“parts of the financial services industries need to reflect deeply on their role in theeconomy, and to recommit to a focus on their essential social and economic functions,if they are to regain public trust. Adair Turner Mansion House Speech 2009
Socially Useful Financial Services Support for “Real Economy” Transactions Risk Mitigation & Pooling Capital Allocation
Kay Review of UK Equity Markets and Long-Term Decision-MakingIndependent Review for BIS July 2012“It is especially urgent that we work outhow the equity investment regime can berecalibrated to support the long-terminterests of companies as well asunderlying beneficiaries, such as pensionfund members.” Business Secretary Rt Hon Vince Cable MP launching the Kay Review
Professor Kay’s Analysis• Short-termism is a problem in UK equity markets• Causes: – Decline of trust – Misalignment of incentives throughout the investment chain
His Way Forward• Restore relationships of trust and confidence• Diminish role of trading and transactional cultures• Improve investor stewardship• Shift to market structures that create appropriate incentives rather than countering inappropriate incentives through detailed rules of conduct• Tackle misaligned incentives• Reduce pressures for short-term decision making 10 Principles and 17 Recommendations
His RecommendationsInclude:• Good Practice Statements / Enhancements to Stewardship Code / Fiduciary Behaviour• Investors’ Forum• End to quarterly earnings reporting• Disclosure of investment-related costs• An independent review of metrics and models• Improved remuneration: company directors and asset managers
Ensuring Equity Markets support Long-Term Growth: The Government Response• Accepted analysis & conclusions• Endorsed the ten principles – Supported directions for market participants – Will explore directions for regulatory policy• Responded to the seventeen recommendations• Progress Update: Summer 2014
Industry ReactionsVersion A Version B 1. Support the analysis 2. Not so sure about the detailed recommendations
Industry Reactions“... the recommendations are underwhelming. Of the 17 proposals (aimed in the main at issuers and investors), few have substance and some call for further reviews — it is a review calling for more reviews ...not direct action that would break the 30-year history of mutually supportive, non-self-interrogatory locked-in agendas for the media, money, and power circles ... there is no catalyst here for restoring trust.” Clare Fargeot, CFA Institute (EMEA Region) on CFA Institute blog, August 2012
As influential as Cadbury? “Many boards at the time had too much of the flavour of a club, with collegiality taking precedence over constructive questioning and challenge.... “While support for the Code was extremely heartening, there naturally were criticisms. Some considered that it would fetter enterprise, others that it had no teeth. ... “What was striking was how quickly and how widely companies accepted the Code’s recommendations. .. “I believe that in that short space of time [since 1992] boardroom effectiveness in this country has been transformed. .. Sir Adrian Cadbury, 2012
Engaging Asset Owners: UKSIF’s Next Step Ownership Day Tuesday 12 March 2013
Kay Review: A catalyst for restoring trust? Acknowledgement: OccupyLsx
Thank youReputation in Financial Services22 January 2013 @UKSIF @NEIW13 @PennyShepherdUK
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