Fund Governance Insights

Reflections from a depositary on Covid-19

5 minute read time

Covid-19 has created operational challenges across the investment ecosystem – from asset managers and asset owners to service providers, including depositaries.

However, the industry as a whole has adapted well amid unprecedented change, and shown considerable resilience in a volatile market. At NatWest Trustee and Depositary Services, we’ve adopted agile working practices and have been able to provide continuity of service thanks to ongoing investment in technology and a thorough review of operational procedures.

But these have been exceptional circumstances, and it is worth taking stock of the scale of disruption that the coronavirus pandemic has caused. The figures are quite remarkable: there were a record £10bn of outflows from funds in March, as well as widespread suspension of daily dealing property funds due to concerns about material uncertainty. We have also seen a significant decline in dividends as companies focus on protecting balance sheets.

Regulatory reaction

From a regulatory perspective, the pandemic has also proved disruptive. Regulators moved fast in the early stages of the lockdown to provide the industry with guidance and support, and we saw a moratorium on some aspects of reporting in order to allow firms to focus on their own stability and enact their contingencies. Deadlines for major consultations such as those on operational resilience were pushed back, and planned surveys – for example on open-ended fund liquidity – were also postponed. Arguably, the priority has been to deliver the tactical steps needed to help firms to manage the impact of the virus before returning focus back towards more strategic set-piece initiatives.

Operational disruption

Operationally, there have also been a number of challenges to contend with, but firms appear largely to have adapted at pace: the uptake in working from home has arguably been so successful that there are implications for the post-pandemic working environment, in terms of a more permanent adoption of remote working as a default. Some asset managers have announced that their employees will now be able to work from home on a permanent basis if they wish. This does, of course, create additional regulatory considerations in terms of data security, oversight and conduct, but regulators have reacted to this shift with new guidance. Other aspects of the operating rhythm of the investment industry, such as AGMs, have also been disrupted: swift changes in rules have been required in order to facilitate some virtual AGMs, while others were subject to delay or even cancellation.

Amid the disruption, there have also been a number of more positive trends observed. For example, open-ended funds have performed relatively well throughout the year, and UK savers put £4.7bn into retail funds in May 2020

More positive trends?

It is worth noting that, amid the disruption, there have also been a number of more positive trends observed. For example, open-ended funds have performed relatively well throughout the year, and UK savers put £4.7bn into retail funds in May 2020, building on the positive fund flows that we saw in April. Active funds saw continued strong net retail sales of £3.5bn in May. Environmental, social and corporate governance (ESG) matters have gained increasing attention: responsible investment funds under management have grown throughout the year, suggesting that Covid-19 has driven increased interest in investing in funds, and particularly in those with a focus on societal impact.

Our perspective

From our perspective, we have been focused on ensuring ongoing support for our clients. Achieving this during office closures has dictated adjustments to our own business; for example, our regular regulatory update briefings and webinars are now delivered virtually. This has, in fact, proven to have some benefits, as it allows larger numbers of attendees to join irrespective of location. Our depositary team has been focused throughout the crisis on supporting clients to make informed decisions and providing immediate understanding of the regulatory implications of the courses of action available to them.

Looking forward

As we look towards the end of 2020 and into 2021, the shared experience of the Covid-19 pandemic raises important questions for the industry on an operational, regulatory, financial and fiduciary level. But in considering the long-term consequences of these events, it is also worth reflecting on the resilience and continuity that has been shown in the face of unprecedented upheaval.

By Peter Flynn

Associate, Funds Regulation & Governance