Business, Innovation and Skills CommitteeWritten evidence submitted by Fidelity Worldwide (Providing oral evidence 26 February, 2013)

I would like to thank you for your invitation to appear before the BIS Committee as it considers the Kay Report. Professor Kay has written one of the most authoritative reports on asset management that I have read in over 25 years in the industry. It is thought provoking, and I believe can help the industry define its purpose and future role.

While the report raises numerous serious issues that will require thorough discussion, there are three topics I would like to highlight before the panel hearing which may help the Committee’s deliberations.

Firstly the report proposes that remuneration within asset management should be based on long-term, equity ownership. Fidelity endorses this proposal and believes that there is a strong case for reform. Long-term incentive plans are seldom longer than three years, which we consider too short. We feel that equity should be held for a minimum of five years, or, as in our case, until the individual leaves or retires. Once asset management remuneration has been reformed, the industry will be better placed to encourage boards in other industries to adopt longer term remuneration schemes.

Secondly, the report highlights the stewardship responsibility of asset management, and the broad benefits that yield from boards answering to an engaged shareholder basis. We would agree with this conclusion and have a very active corporate governance team engaging with UK companies on a daily basis. However, we find that many in our industry still ‘vote with their feet’, selling shares they deem unattractive rather than seeking to improve corporate performance. This is the ‘free rider’ problem. We would also add that the regulatory framework does not naturally assist a close working relationship between board and shareholder in the public market.

The market abuse regime, with good reason, restricts the information asset managers can receive, limiting the influence shareholders can bring to bear on directors. Somehow we need to resolve the twin goals of engagement with uniform information.

Finally, Kay argues that the industry has become too short-term. This manifests itself in a culture of quarterly performance reviews, high asset turnover, falling levels of client retention, and a plethora of new products such as hedge funds which cater to these trends. We agree that the industry has become too short-term in its thinking, and the persistency of client assets is an industry-wide problem. Our experience is that client persistency is weakest through bank distribution channels, and highest when we have a direct relationship with the client. There is certainly a need to simplify the layers of intermediation in the industry, while retaining the benefits that open architecture offers clients in terms of choice, transparency and cost.

There is so much in the Kay Report that warrants discussion. I am sure that I will be unable to do it justice, either now or during the panel session. However, I hope this letter will help your Committee extract as much from the panel session as it can.

Dominic Rossi
Global Chief Investment Officer
22 February 2013

Prepared 24th July 2013