Sententia articles November 2020

In this issue

How will Brexit affect your business?

So here we have it: the transition period ends on 31 December 2020, but we still don’t know if we’re going to get a ‘trade deal’ and that negotiation window is getting smaller by the day...

Joe Biden on climate change 

What does the new President Elect have in store for tackling the world crisis?

Incorporating Client Attitude to ESG

The first of a two-part of a look at the impact of proposed regulatory changes on financial advice by Lee Coates OBE, Ethical Money and ESG Consultant 

Retirement risk avoidance - thought leadership piece from Just

For many years now, conventional wisdom states that there is only one well-trodden path when it comes to the creation and management of a private investor’s wealth... Things become a little more complicated, however, when an investor starts to draw down on their wealth to support them through later life...


How will Brexit affect your business?

So here we have it: the transition period ends on 31 December 2020, but we still don’t know if we’re going to get a ‘trade deal’ and that negotiation window is getting smaller by the day.

The impact to the financial services industry - let’s be honest - is really complex in terms of all the legalities and regulatory framework and there’s no getting away from this. We don’t know how Brexit will really hit but there are some obvious conclusions we can draw. Brexit will impact UK-based financial firms who currently rely on passporting out to the EEA. With passporting potentially going, if there’s no deal or if the ‘new deal’ doesn’t include financial services, carrying out regulated activity in the EEA territory could be a thing of the past, unless of course you’re getting geared up for this and spend the time and money needed to get direct authorisation from the regulators in the European country where you want to do business.  If your business is only about UK financial advice then you might not expect there to be any impact, including possibly looking after your EU clients if you advise them in the UK. However, you should always do your own research so that the channels are clear for the sail ahead for a compliant business.

As for passporting-in dilemmas, for inbound EU firms and investment funds the FCA’s temporary permissions regime (TPR) has provided a solution, albeit a temporary one, to allow firms to continue their regulated activities in the UK. From what we’ve seen, TPR has been supportive at least on the trading front; the majority of offshore fund providers have registered, allowing clients a greater and more diverse range of investment assets from which to choose. These Providers of course still have to work towards obtaining permanent FCA permissions, but they have some time to do that now.

Finally, you will no doubt have heard or read in the press how a few well-known UK banks have been trying to tackle Brexit compliance issues by opting to close their banking services to EU based customers, including ex pats, which might affect your EU clients. But all of them work differently and the situation does seem to depend on where a customer lives in the EU for the retrospective legislation. UK bank account closures are by no means the norm; many are continuing to provide UK banking services, so clients should still have options. 


Joe Biden on climate change 

What does the new President Elect have in store for tackling the world crisis?

The month of November started with the world on tenterhooks, watching and waiting for the result of the US election. Unlike most recent elections, this time the system had to face the challenges of processing votes during a worsening Covid-19 pandemic. The larger number of postal votes meant the counting took much longer than normal, and we just had to keep waiting to see whether Joe Biden would put paid to Trump’s hopes for a second term. It was on Saturday 7 November that we finally received the news that Biden was projected to win the key battleground state of Pennsylvania and therefore had successfully captured enough votes to secure the election. Donald Trump continues to contest the result, but consensus amongst experts remains that his claims are unfounded.

One reason why the world has watched the US election so eagerly is that so much seemed to hang in the balance for the future of the environment. A pro-Green presidency can only be good not just for the United States, but for Europe and the rest of the world. It will also create shifts in the markets. We have already seen interest in “ESG” or “Ethical” investments grow tremendously in the last few years. Sustainable funds in the US have already attracted $30.7bn in net investment flows up to the end of Q3 2020. This is already a record and breaks 2019’s total investment for the year of $21.4bn. A pro-Green US government can only help to increase awareness and improve performance, and this could well lead to more investors turning towards an ESG favoured solution.


Joe Biden is one of the most experienced presidential candidates for many years. He has worked as a Senator since the 1970s and worked successfully as Vice President for Barack Obama for two terms from 2009 to 2017. He has already stated that key items on his agenda for January are Obamacare, Brexit and re-entering the Paris Agreement to fight climate change. The Paris Agreement was set up through the United Nations to deal with this global challenge. Under the agreement each country must plan and regularly report on the contribution that it makes to mitigate global warming. President Elect Joe Biden played a key role under the Obama administration in signing the agreement in 2016. Donald Trump subsequently served notice that the US would leave the agreement when he took office in 2017.

Is the US a green country?

It is important to note that while the US did not have a pro-Green policy under Trump, and did not deem it necessary to tackle climate change, or set targets for the country, there are a vast number of companies, scientists and entrepreneurs in the US that have worked hard over the last four years to embrace this challenge and strive to make sure the US continued to take steps and make advancements in this area. Companies such as Cisco, Tesla and American Water have made much progress in making the US business and environment more sustainable. All the same, there needs to be an organised approach on a national level, with the right support and incentives to help these companies move to a higher level of sustainability.


As you can see from the above image, the US has some ground to make up in utilising renewable energy sources. Due to its temperature and coastal cities it has great potential both for solar and wind power to be fully utilised. It already produces more wind and solar energy than some countries, but much less as a total share of the needs of its population.

So what about under Biden?

President Elect Joe Biden is proposing to make the US carbon free by 2035, with the aim of achieving net zero emissions by 2050. Biden understands that action on climate change has two important benefits: making the US energy efficient and utilising renewable energies on the one hand, and providing new jobs for Americans to help get people back into work on the other. So what are the options?

  • Financial investment – Biden plans to invest $2 trillion over the next four years. This money will be spent in making buildings more efficient (both business and residential) and upgrading public transport as well as incentives to switch to the use of electric vehicles.
  • Temperature targets – the Paris Agreement agreed a temperature limit of 2 degrees Celsius for participating members. However, many scientists have said that this will not be enough and therefore Biden wants to set a limit of 1.5 degrees.
  • Forcing companies to disclose their climate risk – we have seen similar disclosures coming into place in the EU which puts pressure on companies to disclose their climate risks. The G30 calls on governments to set out clear timelines for making the disclosure standards set by the Task Force on Climate Related Financial Disclosures (TCFD) mandatory by 2023.
  • Setting a carbon price benchmark – carbon pricing has become a key policy mechanism to mitigate the impacts of greenhouse gases. Carbon pricing is effectively the method of putting a monetary cost to the use of carbon / production of greenhouse gases. It’s a tool now used across the world to help incentivise businesses to lower their carbon footprint.
  • Improving the EV tax credit – this could see a change to the EV tax credit with a 600,000-vehicle manufacturer cap and a credit cut from $7,500 to $7,000. Biden has also discussed setting a $250,000 household-income limit for claiming the credit. Lifting the current caps would make the credit available to a much wider audience.

It is a lot of pressure and a lot to achieve for a new president, especially during a global pandemic. Several stakeholders believe that a Biden presidency with a pro-Green policy can make great strides in helping the US maximise its potential.


Incorporating Client Attitude to ESG 

The first of a two-part look at the impact of proposed regulatory changes on financial advice by Lee Coates OBE, Ethical Money and ESG Consultant

As Mr Dylan would have it, the times they are a-changin, and this is particularly true for financial advice over the next year. There has been much commentary about ESG (Environment, Social and Governance) over the last few years, but to date it has all been about what investment managers are doing. Proposed Regulatory changes will mean change for the adviser community as well. 

ESG offerings have grown dramatically over the last two years, mostly because fund managers are now required to state their ESG position (thats Regulation as a catalyst for positive change). There is no doubt that the majority of fund managers will claim there are investment benefits from following ESG, but there will be many different ways of applying an ESG process. Fund managers should have been applying sound Governance policies for some years (lets hope it hasnt only just occurred to them when picking stocks), so that leaves managers with a free reign on how they might incorporate environmental and social issues into their investment process. Best case scenario is a fully integrated process across all investment decisions, taking into account a companys social and environmental impact. Worst case scenario…”Yeah, we do ESG as well

The proposed changes for advisers are a result of a tweak to the MIFID II rules. In a nutshell, the advice process will need to incorporate an assessment of each clients attitude to ESG. Advisers will need to record whether a client wants to apply ESG factors as part of their advice process. This in itself is interesting, but hardly a process change. However, there is a second part to the ESG question; advisers need to demonstrate that they have a process in place to deal with a Yes answer from a client. This process needs to be incorporated into the current MIFID II processes for selecting products and funds. It isnt good enough to say Ill deal with it if I get a Yes, as a formal process needs to be in place. 

This is more about Compliance functions than ESG just see it as a new section in your Compliance Manual.  With no right or wrong way of managing or advising on ESG, the regulatory focus will be on due process in the event of a client expressing an interest.  The process you adopt is one that fits in with your firm and meets the needs of your particular client base.  There is no doubt that investor interest in ESG will increase, but how engaged clients are will depend on each client. Most, after expressing an interest, will leave it to you, their IFA, to build into your advice.  This does give you a broad degree of flexibility, but it also attaches a high degree of responsibility to get your product and fund recommendations right.

There is no doubt that ESG will impact on day to day advice processes, but the impact does not have to be significant. Many advisers are going to see article after article telling them that they will need make wholesale changes to their business, that ESG will be a cornerstone of what they do and that they will have to become overnight experts. Reality check: most of those telling you that you have to fundamentally change the way you do things have a fund or product to sell. Most of these people have also never been an adviser and dont understand what advisers do. Personally, I think the changes to the advice process are a good thing because it gets environmental and social issues out into the open when discussing investment options with clients. The changes are, however, very manageable and can significantly enhance the client-adviser relationship. Clients can feel that they are making money (look at the strong performance of ESG mandates) as well as being part of making a positive difference. 

So instead of seeing ESG as the Fifth Horseperson of the Apocalypse, look at it as a new process to run alongside your GDPR and AML procedures. Unlike GDPR and AML however, ESG can have a very positive client impact. The benefit ESG offers is that for those clients who arent interested, there is no impact on the advice process. For those clients who see ESG as important, talking about it and bringing it into the advice process will be seen as positive. Rare for IFAs, but that looks like a win-win to me! 

In Part 2 of this article, I will look at ways in which IFAs can build a compliance friendly ESG process and how to offer advice in this growing area.


Retirement risk avoidance

Thought leadership piece from Just

For many years now, conventional wisdom states that there is only one well-trodden path when it comes to the creation and management of a private investor’s wealth. It’s a path that follows the doctrine of Modern Portfolio Theory (MPT) and the tenets of the Efficient Frontier and portfolio diversification. As the only game in town, everything is geared up to support this philosophy, with risk profiling software helping advisers to identify a client’s risk appetite and match them to an appropriately diversified portfolio (hopefully on or above the Efficient Frontier), all in adherence to current regulatory and business quality requirements.

Things become a little more complicated, however, when an investor starts to draw down on their wealth to support them through later life, as rather than there being just one doctrine, there are two distinct and differing approaches. One of these approaches - the ‘Probability-driven’ methodology - still draws heavily upon MPT, supported by stochastic modelling to establish a safe (or rather, sustainable) withdrawal rate. The other ‘Safety-first’ philosophy takes a very different approach in a number of key areas. As the name suggests, ‘Safety-first’ is focused on not taking unnecessary risk in meeting elements of a retiree’s income requirements. The Safety-first advice approach is therefore seen as most suitable for those retirees who have limited risk capacity.

At the heart of the Safety-first approach are two things:

  1. The belief that not every pound of retirement income has the same priority or importance
  2. An asset-liability matching investment approach is required to align appropriate assets to cover the various retirement income liabilities

The first point gives rise to the importance of establishing some form of income liabilities hierarchy, typically identified by descriptors such as essential, lifestyle and discretionary, along with any capital liabilities such as leaving a legacy. The FCA actually suggest this approach within GC20/01[i] of its guidance paper on advising on pension transfers.

The second point is where a challenge to the current approach to measuring risk, aligned purely to MPT and capital volatility, is introduced, as one of the asset types an adviser can use to match against the higher priority income liabilities is a longevity insurance or risk pooling product… An annuity in other words!

Incorporating an element of risk pooling into a retiree’s portfolio asset allocation offers two significantly improved client outcomes:

  1. Investment and longevity risk are removed from a proportion of a retiree’s income. This portion of income is guaranteed for their lifetime and can reduce the overall impact of a poor sequence of investment returns on the portfolio, especially in the early years, thereby improving overall portfolio sustainability.
  2. Because the capital cost of securing this portion of income for life is based on cohort life expectancy, rather than having to plan to a much later age when self-insuring under the ‘Probability-driven’ approach[ii], less capital is required. So the portfolio should be able to support a higher level of overall income, or provide greater inflation protection, or help towards contingences such as care costs.

Further improvements to client outcomes can also be evidenced where an annuity is viewed as part of the fixed income holdings within a client’s overall retirement portfolio. Hopefully risk profiling software will soon evolve and develop to make this part of evidencing suitability easier for advisers. In the meantime, why not take a look at Secure Lifetime Income available within the Novia platform SIPP, as annuities have already evolved, even if risk profiling software is yet to catch up.

[i] FCA GC20/01: Sec 4.14 ‘The client’s circumstances’

[ii] Page 289, Safety-First Retirement Planning; An Integrated Approach for a Worry-Free Retirement.

Wade Pfau, Ph.D. CFA  RICP