A rise in passive investing can “co-exist” alongside investors’ desire to preference investments that embody their values and longer-term goals, the Financial Conduct Authority has said.

Delivering a speech to delegates at the Investment Association’s Culture Conference, 6 November, FCA chief executive Andrew Bailey spoke about the longer-term shift towards passive investment “which suits the needs of a lot of investors”.

He noted that 80 per cent of assets under management are from institutional investments, but behind the figure is individuals. “It is important to remember that they often represent the long-term savings of individuals who are trusting that this will provide a comfortable retirement. And this is increasingly so, because over time the responsibility for retirement saving has been transferred from employers to individuals, and of course with that has gone the risks involved in such saving.”

Bailey quoted figures from the 2017 Mintel Equity Investing UK report, which indicated that 54 per cent of respondents believe ethical investment is important, up from 39 per cent the previous year. He stated that the FCA is currently consulting on rule changes to require the independent governance committees of contract-based pensions to report on how they manage environmental risks in their investment strategies and how they take into account the ethical concerns of investors.

“The government has also agreed to clarify that trustees have a fiduciary duty to consider long-term risks and opportunities. It is consulting on amendments to scheme regulations that would oblige trustees to outline how they take account of financially material risks and opportunities including climate change considerations. The government has also agreed that it is good practice for pension scheme trustees to inform the design of investment strategies with an understanding of the views and preferences of their members,” he said.

In addition, he noted that in last week’s Budget, Chancellor Philip Hammond announced plans to unlock finance for innovative high-growth firms, and established a taskforce to address the barriers to pension funds investing in so-called patient capital. “The FCA will publish a discussion paper by the end of this year to explore the impact of the UK’s existing fund regime on investment in patient capital and we will consult to update the permitted links framework to allow unit-linked pension funds to invest in an appropriate range of patient capital assets,” he said.

Bailey stated that a “longer-term shift towards passive investing goes alongside a desire for more ethical and socially responsible investing and a desire to encourage longer-term patient capital”. He believes the two developments can co-exist: “Indeed, I would go so far as to say that they will, and that in doing so there will be some re-clarification of the meaning of active investment.”

“The regulator can help by enabling change to happen,” he said.

In addition, Bailey also spoke about the pension freedoms, which he said is an area where individuals need to take responsibility for their own decisions. “It is reasonable that they will want to put their trust in experts who can assist with advice and guidance on decisions on saving and investment," he noted.

“This brings into play the culture and behaviour of those in whom trust is placed, the investment managers and advisers – so, the stakes are high, and getting higher I would say. Probably around three-quarters of households in the UK are direct or indirect customers of investment managers. To be frank, this activity is no longer the preserve of the wealthy – it is central to the financial well-being of most people in this country.”

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