"Do we have a U-turn on the menu today?" asked the chairman of the improbably-sized investment company Prandeamus Asset Management when I visited his office this week.
"No," I replied. "Over the coming weeks, there should be plenty of time to chat through the UK's apparent shift to a One Big Vote A Year regime so let's stick to resolving our recent cliff-hanger ending."
"From two weeks ago," the chairman said pointedly. "Some cliffs are bigger than others," I shrugged. "Still, to refresh our memories, we were considering the possibility all investment products or asset classes must fail in some way - through a scandal, a crash or whatever - before the wider market is really prepared to commit cash to them.
"I suggested a significant flaw in this argument was the passive investment sector had never really been through any sort of reckoning and yet money continues to pour towards it. Then you implied you had some thoughts on that courtesy of your ‘Chairmovision' network of surveillance cameras hidden in assorted offices around Whitehall, Canary Wharf and the City of London."
The chairman clicked a remote control at a huge portrait of him looking statesmanlike, which slid back to reveal a giant television screen surrounded by lots of smaller ones. The giant screen flickered to life to show two people sitting in a meeting room, a caption in one corner reading ‘Canary Wharf 17'. "But you're not taking my concerns seriously," an earnest-looking young woman was saying.
"I should think not," a man, who seemed to be her boss, replied. "I know you're worried about our ending up on the wrong side of the lawyers on this but one of the great things about being the FCA is that, under the Financial Services Act 2012, it's really tough to sue us unless we have been acting in bad faith or unlawfully, according to the Human Rights Act 1998."
"Yes, yes, I know that," the woman replied with barely concealed irritation. "And obviously enjoying a level of protection afforded almost no other organisation in the country is tremendously good for one's self-esteem. But it's not the legal aspect I'm worried about here so much as our long-term reputation as the country's financial services watchdog - not to mention the wealth of potentially many thousands of investors who …"
It was the boss's turn to show some irritation now: "Yes, yes - lots of punters losing lots of money. Very sad. But talk me through this supposed threat to our reputation one more time?" "OK," replied the woman, taking a deep breath. "Would it be fair to say that, while of course the FCA has no actual policy to endorse passive funds ahead of active ones, that is how from a certain angle it might conceivably look to the casual observer?"
"But …" her boss began. "Remember - I'm talking perception here," the woman stressed. "Then I suppose it might occasionally appear as if, as an organisation, we might believe active funds smell of sour milk and their mother dresses them funny," her boss conceded. "But, if we're talking frankly, that hardly counts as a massive change of heart on our part - or indeed on our predecessor's position."
"True," the woman nodded. "But what has changed is the sheer weight of money flowing into passive funds in recent years. Now, the market crashes of 2008 and, before that, 2000 were the two times the sector would have been through any kind of - what would be the word? - reckoning … but those instances will be as nothing to the outcry we might expect when the next crash comes.
"Essentially, we have markets at elevated levels and the marketing efforts of the passive sector reaching the crescendo they tend to at such times. Unlike 2008 and 2000, however, we have seen a lot more money - and retail punters - heading into passives and now have what I believe to be the very real danger many are doing so, at least in part, because of the perception passives now enjoy a kind of regulatory stamp of approval." "Hmmm," hmmmed her boss. "Maybe I should get the lawyers to have a quick look at the 2012 Act. Just to be sure."
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