An interview with Anne Richards: The challenge of a changing City landscape

In the final session of the IR Society's 2017 conference, Evan Davis interviewed Anne Richards about the impact of Brexit, the economy and regulation on markets and the investment industry.

ED: Let’s start with Brexit, Europe and Trump. What are your thoughts? 
AR: We know ‘Brexit means Brexit’. I’m not sure we’ve moved on very far from there. Most businesses I have spoken to have already started work on their contingency plans. They are prepared for a hard Brexit, soft Brexit, a short or long transition – whatever it might be. Work on the basis that we’re out in less than two years and we have to be able to work with whatever map is presented to us! 

The recent governmental shifting has been quite helpful because the very hard-line attitude which was taking shape before the election was playing out extraordinarily badly in Europe. If you start trying to negotiate from a positional perspective, you always get into deadlock – you need to try and make the pie bigger. 

Trump’s inconsistency with his foreign policy announcements and opinion of NATO has raised some serious concerns in Europe – particularly in Germany and France. You can’t really have a proper European defence policy without British involvement. Given a new political climate in France and a slightly softer approach from the UK side, there is a construct which might mean we could make the pie a little bigger. 

Macron (despite being very pro-European) has been critical of the EU infrastructure, the expense, the commission, and the accounts that haven’t been signed off. Maybe there is a way in which we can make the EU more efficient,  bringing down the cost, and therefore making it more palatable.

ED: What about the City? Will London’s role diminish in the next few decades?
AR: We do have the capacity to snatch defeat from the jaws of victory. London has  a critical mass of skills and volume. There are more people employed in financial services in London than are actually inhabitants of Frankfurt today. However, if the political environment makes it more difficult to do business here – while other countries are becoming more pro-business – London will find it increasingly hard. 

ED: Do you think business can live with ‘populism’ and how does this affect the government’s relationship with business?
AR: What we see, election after election, is people expressing their anxiety through the ballet box. People have seen a squeeze on their income, but also much more volatility of that income – particularly in the US. People don’t want a complicated answer to questions. They need a simple answer. Mainstream political parties need to go back to the basics and focus on what it is we need to do to build a society. We want more certainty in our lives. 

The government says that it wants to create jobs in the UK, wants a British economy, wants to do things together. On the other hand, it continues to put pressure on government-owned entities to go through outsourcing provisions. There is a disconnect there. We have to make a choice about what sort of society we want. We talk a lot about ‘British values’ – but we don’t say what they are very often. 

The Irish had the brilliant and unique insight that a low tax rate, rather than a subsidy, attracted profitable businesses, rather than ones which needed to be propped up. It was brilliantly successful. I think the government can help without using a policy which is necessarily top-down. We need a more careful and thoughtful policy. 

ED: What’s your take on the economy?
AR: I understand why rates were cut very rapidly after the referendum result. I couldn’t understand why they weren’t normalised really quickly afterwards. It would have meant there was more ammunition in case the economy does need some kind of boost going forward. 

I don’t think anybody is saying this blip in inflation is going to be meaningful and sustainable at this current level for more than a period of time through the adjustment of sterling. It’s not really demand-led, it’s a one-off shock.  

ED: Are you optimistic or pessimistic about the impact of Brexit? 
AR: We are still in the EU. March 2019 will be the first time the tile exporter from the Midlands has to fill in 20 forms to get their goods either in or out of the UK. It’s the first time someone will try to hire somebody and can’t. It is the frictional costs which we are not yet bearing which will hit things. Is there going to be an impact? Unless the transition is very gentle, or Brexit has a very loose definition, yes. 

ED: Let’s talk about IR – what makes a good investor relations professional? 
AR: Being able to tell a consistent narrative is important. Trying to find a way to answer the question even if you can’t answer it exactly because of disclosure rules. It’s really important. Rather than simply saying ‘no, it’s not public’ but saying ‘actually, here is something else, which gives insight into the issue you are raising’.

ED: Do you worry about the future of the traditional investment funds? 
AR: I think the world will look very different in 10 years’ time, assuming the growth of passive investment management continues on its current trend. Active managers effectively determine your portfolio construction, but if you choose a passive manager, it is not the manager but the index provider who determines the weights in your portfolio. The costs for this are going up. In public markets the amount of capital that is allocated by the traditional long-only manager will probably fall – it will never fall to zero because the social usefulness of active, thoughtful allocation of capital, differentiating between good and bad business, starts to make an economic return. 

There are fewer and fewer companies that actually want to be listed in public markets. The majority of companies you see coming to market are actually founders or owners selling out, rather than businesses coming to market for growth capital. Even where you see a company like Snap Inc. coming for growth capital, it doesn’t trust ‘one vote, one share’ because of short term shareholders. It puts in place mechanisms to protect itself.
What we see is more capital going into private markets, and it is smart capital. The free market economy is all about the efficient allocation of capital. We just need to drive down our cost of doing that so we can make money for both our customers and for ourselves as well. 

Back when I started as a desk rookie 25 years ago, there were more than 900 listed companies; that’s gone down to about 600 give or take. It is the same story in the US. This trend has been under way for a considerable time and will likely continue in the long term. 

For a company managing its shareholder base, it becomes quite tricky. More and more money that is effectively following arbitrary portfolio construction is coming from an index provider. They don’t really care whether your investment plans are good or bad – they’re going to own your shares anyway. 

ED: What about fee structure? Some people feel ripped off by retail products.
AR: It’s a very complicated landscape, and I think the industry’s response was pretty clear in saying that transaction costs are very difficult to calculate. For retail type products, a clear-cut, clean fee that people can understand would be ideal. It is not helped by regulation such as MiFID and PRIIPs – the same fund has to have its charges represented in two different ways. 

Regulators can help us on this – but we have to do a better job as well. We need to make it clearer why we charge a higher price for something that requires more service. For example a mutual fund is more complex than a segregated portfolio. There is a scale issue as well. We have to make clear why we charge different amounts for different things.

Published 31 July, 2017

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