Jonathan Lipkin on DRIVING innovation in investment management

In this episode we speak to Jonathan Lipkin, Director of Policy, Strategy and Innovation at the Investment Association, about the IA’s tech and innovation work and how it fits into the IA’s overall strategy, known as DRIVE.

Transcript

SPEAKER_00 0:10

Hello and welcome everybody to the IA Talks Innovation. My name is James King. It's my pleasure to be your host today. And joining me in the studio, I'm joined by Jonathan Nipkin, the Director of Policy, Strategy and Innovation at the Investment Association. Jonathan, great to be here. Thank you very much. Now, Jonathan, we're going to be talking about the approach to technology and innovation at the Investment Association. But before we dive into all of that, it'd be great to hear a bit more about yourself actually and your career. So tell us about your career today and how you ended up being the director of policy, strategy, and innovation than you are today.

SPEAKER_01 0:50

Well, it's been a long time at the IA for me, and I've enjoyed my years here immensely. I started off thinking a lot more about the long-term savings and pensions industries. I then went on to think about broader customer delivery across retail, institutional, private wealth, and all the time working on aspects of innovation. Because as we'll get onto, for us, innovation is a lot about how do we do things differently, how do we do things better. And as an industry for the last decade in particular, we've been challenged and challenging ourselves as to how we do deliver better for our customers, whether they're in the UK or around the world, and how we support growth in the economy and broader capital markets.

SPEAKER_00 1:38

Fantastic. And then how many years have you been at the I8?

SPEAKER_01 1:42

Oh, that's a closely guarded secret, James. But no, it's been around uh two decades actually. I joined the organization uh expecting to be here for a relatively short period, but it's been a tremendous industry to work in and uh tremendous organization to be part of. And uh the innovation brief is one that is keeping us extremely busy, as we're going to discuss today. So hopefully I'll be here for a little while longer.

SPEAKER_00 2:05

Absolutely, absolutely. Uh and maybe one fact that our listeners may not be aware of. You're, of course, a very talented composer amongst your many other talents, and the jingle for the IA Talks Innovation podcast and the jingle for the IA Talks AI. You you actually compose those.

SPEAKER_01 2:26

Dave Far, my main contribution to the podcast, but I'm looking forward to speaking to you today and uh getting into some more substance.

SPEAKER_00 2:34

Excellent excellent. Okay, so let's talk about how the IA thinks about innovation.

SPEAKER_01 2:42

And you know, is innovation just about technology or is it No, it's a lot broader, and I think we've already touched on something that's incredibly important about innovation in general. Sometimes people are quite scared of the term innovation, particularly in financial services. And our point is that it's never just about doing new things, it's about how you do new things. So it's a combination of the tools and the way in which you use those tools to make a meaningful difference to the way in which the industry can deliver for its customers, but also more broadly in the capital markets and across the economy. That's the first sort of fundamental point. There's another point here which goes directly to your question about technology. It's really hard these days to have a conversation about innovation without focusing on tokenization and AI. And I'm sure we're going to get into that a lot in this discussion because we're in a period of extraordinary technological change. But for us, the most successful innovation is likely to be bringing together technology and behavioral change. And we've had examples in the UK in the last 10, 15 years where it's actually been behavioural change that can bring about some of the greatest innovations and changes in the way in which we deliver. I'm thinking particularly here about automatic enrollment in the pension system, where we could see, and I say we, the policy community, the industry, broader stakeholders, that we often make assumptions about how people behave. And those assumptions rest on an expectation that people will do the right thing with the right information. And again, we'll come back to this because it's so important in how we engineer change. And we realized collectively that by changing that, by reversing those expectations, we could bring about some very significant wins for the UK population. So automatic enrollment is an example of innovation where actually we didn't need technology at all. What we needed was an insight about how we can encourage people to do something by taking the step for them and then allowing them to opt out, as opposed to the traditional approach of suggesting that they should do something and then waiting for it to happen. And then I think the last point about innovation that is very important is it's also about how you do things, how you bring about change. So we talked about the what, but the how, how you work with your members, if you're a trade association, how you work with government, regulators, broader members of the stakeholder community, is also critical because you're not in an ivory tower. We're not a think tank. We're here to work across industry, across the economy to deliver better outcomes.

SPEAKER_00 5:51

And if I could just come back on something you said that, I think it's very important about behavioral change, cultural change being so important. It reminded me of an example. If we think back a couple of years ago when the whole world was hit by the COVID pandemic, something that struck me at the time was how the organization I was working at at the time, we'd all had MS teams on our computers for a good year, but no one used it. And you were still dealing with colleagues who send things to you with um, you know, they printed out a copy and written them over in red pen. And it was only that sort of structural shift of everyone having to suddenly work from home that actually forced the innovation for people to actually start behaving differently, for the culture to change and to really embrace the technology. So um yeah, no, thank you. So some really good points there. So, Jonathan, I wanted to hear from you more about the IA's strategy. So, more the architect of the drive strategy that uh is pushing forward all of this work around innovation and tech. So, could you tell us a bit more about that and what what the um the letters in drive stand for?

SPEAKER_01 7:00

Well, it's very much a collective strategy, but I've been playing a central part in working with colleagues to develop it. And for us, it's a signal of of intent, a signal of intent to our members, to our staff, to government, to regulators, about how the association sees the role of the industry at a time of extraordinary change. I mean, we've we've touched on aspects of technological change already, but as we look around today and we look at what's happening in politics, what's happening in the economy, as we think about life in the UK after Brexit, how we grow, how we think about the future, Drive is trying to position the industry within that broader change process and to articulate a series of ambitions, priorities that we think will deliver good outcomes for our customers, but also will help facilitate competitiveness and also ultimately power growth in the UK economy and beyond. So there are there are five pillars to the drive strategy. They are democratisation, resilience, innovation, sitting very much at the heart of this, value and engagement. And I'll just go quickly through what those mean. Some of it is extremely self-explanatory. For us, democratisation is ultimately about ensuring that many more UK citizens, but also European citizens and potential customers around the world can invest productively in capital markets for their long-term well-being. In some ways, it's as simple as that. The industry is already a remarkable success story in how it can develop and deliver for customers. But there are so many people who would benefit from investing who have not yet had the opportunity to do so. And it's not just about participation, it's also about the kind of things that you can invest in. So there are opportunities that are available to institutional investors, such as pension schemes at the moment, that we can also make more widely available to a broader number of people. And now I'm thinking about opportunities to invest with the appropriate customer protection in private markets, for example. So democratisation is already playing out very significantly in terms of a number of initiatives that we're working on with government regulators in the UK. Maybe come back to that. But sitting alongside that is resilience. And in some ways, resilience is a counterpart to the point about participation. What are we trying to deliver for people here? We are trying to enhance their resilience through their lives and into retirement to ensure that people are better equipped for life's uh unexpected circumstances, but more profoundly to really say for retirement. Resilience is about more than just individual well-being. It's also about societal resilience, it's also about industry resilience. And so what we're articulating there is a mixture of objectives that range from how we work on issues such as climate change, defence spending, supporting government priorities as they change and our customer priorities as they change. But also thinking about our own resilience in some pretty unsettled times. That's partly about cybercrime that we're all exposed to almost on a minute-by-minute basis. But it's also thinking about the resilience of an ever more interconnected global financial system and making sure that the way in which we invest and the way in which we interact with our customers and capital markets contributes to that resilience in a way that can work for everybody. Innovation sits very much at the at the heart of this. Innovating is how we achieve a lot of what we're trying to set out in our democratization and resilience objectives. And I won't say too much more about that now, other than to say that it also connects very directly to the concept of value and engagement. We're very often measured as an industry in terms of value as cost and a sense that value is measured in in terms of price competition rather than necessarily the outcomes that you deliver. And what we're trying to suggest is that our value needs to be thought of in a very broad way. Certainly, cost is incredibly important and delivering competitively is at the heart of what we're trying to do. But our value to customers, our value to the economy is also expressed in a broader way. And last but not least, engagement is something that we touched on right up front. It's how we think about innovation. It's not sitting working on your own projects or telling people what they should think or what they should do. It's about being out there talking to government, talking to regulators, talking to firms, talking to consumers, to trade unions, and understanding the environment and meeting people where they are to ensure that we can deliver collectively.

SPEAKER_00 12:40

So, Jonathan, I want to zoom in on the innovation pillar, if I can. So can you tell us a bit more about why it's so important the investment management industry continues to innovate and forgive the part, but what's driving this imperative?

SPEAKER_01 12:58

So if you take a step back and think about where we are in the technological cycle, we're going through an extraordinary, arguably unprecedented period of change. The world as we know it is being remade. And in financial services, it's going to be remade by a combination of AI and tokenization. And for this industry to both survive and prosper, you have to adopt and adapt and realize the potential that these technologies offer you and your customer and understand that survival is optional. And it's not a given that today's firms will survive in the same form to prosper tomorrow without adaptation. So that's the central uh driver. But if you think about technology across human history, and we go back to where we started from, technology often moves a lot faster than our ability to actually grasp it and implement in ways that are most effective. And you've seen that probably from the days of the printing press. It wasn't a given that the printing press would lead to an age of enlightenment. And indeed, certain uses of the printing press went to some very dark places in terms of human behaviour. So when we think about technology and innovation, we have to think continually about how do we employ that in a way that is going to work to the benefit of our customers, as I say, central to our preoccupations as an industry, but also from there, how that interacts with the wider economy and capital markets.

SPEAKER_00 15:04

So clearly very serious business then. But if we could just maybe dwell for a moment on what's at stake if we don't get this right, if we're not able to innovate and push the industry forward in the way that we've been talking about.

SPEAKER_01 15:22

At a certain level, it depends on what who you mean by we. Because again, if you look at innovation and competition, those that survive and prosper in a new world are not necessarily the incumbents in the old world. So the first thing that is at stake is really this group of companies that are flourishing in today's economy have to make sure that they are the companies that will be able to survive in tomorrow's economy. So there's there's a a corporate adaptation that is probably true of every sector. But I think what's really interesting and important when we think about the political and economic context in which we operate and going back to drive and thinking about particularly the concept of democratisation is that we have an opportunity not just to survive as an industry by adapting to new technology, but to prosper as an industry using new technology to deliver to new customers, as well as existing customers, in ways that will provide greater opportunity, greater choice, and greater efficiency than we've ever seen. And there you get into some really interesting discussions about what tokenization really means in terms of what we can build and how we build it. You get into some really mind-blowing discussions about the potential for AI to change the way in which we think and interact with technology. And you also come back to some of those behavioral things that I talked about earlier. Because our view, and my view particularly, is that we also just have to remember that it's not just about using technology to serve people's needs differently. It's about understanding our customers where they are and interacting with them in a way that is going to give them the best possible chance to benefit from investment. And that doesn't mean necessarily doing the same things that we've done historically in terms of providing certain kinds of information in certain ways at certain times. It may mean that we need to entirely rethink the way in which we communicate, particularly in the age of the smartphone, and particularly in the age of Grok or Claude.

SPEAKER_00 18:12

So just very briefly, can you explain what you see as the real opportunity for the investment management industry that I think doesn't?

SPEAKER_01 18:23

So in a very simplistic way, one is the rails and the other is the brain. So if we think about tokenization, we start very quickly talking about distributed ledger technology and blockchain, and many people move from there straight to crypto and crypto assets. But that's not what we're talking about. It doesn't mean that we're disinterested in the evolution of crypto assets, but it means that what we're thinking about, certainly as the IA more broadly as the industry, is how we harness distributed ledger technology to deliver more efficiently. So we are building a new financial services infrastructure collectively. If you ask me what digitalization of the capital markets means, that's where we are going to. We are going to a digital tokenized capital market infrastructure. And tokens and tokenization, whether it's at the level of the assets or whether it's at the level of the fund, and we can get on to what a fund might look like, constitute to some extent then the rails. AI is a different proposition, particularly when we look at the large language models and some of what is already happening. It's a way of thinking, a way of processing information that we think in tandem with the new infrastructure will fundamentally transform the way in which we build products, think about the investment process, harvest data, and ultimately interact with our customers.

SPEAKER_00 20:02

So Jonathan, you teased us there when you mentioned the future of the fund and what that could look like. I wasn't going to let that one slip up. Could you come back to that?

SPEAKER_01 20:14

Yeah, so I mean these things move uh quite slowly often until they don't. And so when we talk about fund tokenization, this has been something that's been talked about for a number of years. The way that we've conceived it, um, very simply, is in sort of three broad stages of the fund industry's development. There's what we call fund 1.0, which is the traditional mutual fund. So that's the quality out fund in the US, or the early use in the EU, the unit trust in the UK. So a traditional collective investment scheme providing access to a range of different asset classes. You have the first sort of real impact of technology then coming through the 80s into the 90s with the advent of the exchange trading fund. The exchange traded fund is still developing and is one of the most exciting developments, actually, at the moment, when we look at um product mix customer behavior. But we sort of call that fund 2.0, the sort of technological evolution taking us from the traditional fund towards a newer world. We then think about Web 3.0, digitalization, DRT, blockchain, and came up with the idea of fund 3.0 being about tokenization. And that has been the name for our fund three lab, which is thinking about tokenized funds and not so much sort of predicting what the future will be, but actually asking ourselves what a fund could look like in a fully digitized, fully tokenized world where you potentially could customize almost infinitely using new technology. So the question a number of our firms are asking, in some cases quite publicly, is whether our sort of traditional concept of the collective investment scheme, where someone says, Well, we've got a global equity fund or sustainable infrastructure fund in which you, James, myself, maybe thousands of other people invest on the same terms, same fees, to expect the same strategy, gives way to something altogether more customized that takes account of your preferences or my preferences and builds a portfolio of one. And that takes us to a whole new place. And I think as the investment association, we don't have a crystal ball, unfortunately. I wish we did. I might be doing a different job. But what we can see is the potential there to think differently and build differently. And while not predicting a certain outcome, what we want to ensure is that we at the very least get to develop the tokenization infrastructure. And then in all likelihood, market forces, technological advances, customer preferences will determine whether we continue with a version of fund 1.0, fund 2.0, or whether we do move to a more customized world.

SPEAKER_00 23:22

Well, people go with their feet, so to speak, and some people, some investors would appreciate the extra customization choice and would, you know, rush towards those new options, and then there would be others perhaps who would still like the benefits that come with um you know almost like uh default or standard options. You know, um, I'm just reminded of when I popped out to lunch not long ago, I went into this uh salad place, which I'm I won't mention the name of it, but you had to customize your salad completely. And I was completely overwhelmed. I was like, no, I just pick off the menu. So I suspect I'm probably not the only person that thinks like that for my salads, but when it comes to funds, maybe there's always going to be a place for almost like default options for investors.

SPEAKER_01 24:10

Yeah, look, I think I think there's there's a lot of truth in in what you're saying, James, and and and a couple of things on on that point. There the first is that both states of the world can coexist, right? And to some extent they do already. If we look across to the US in particular, you are seeing a growth in more customized portfolios, separately managed accounts being built for customers. A number of our firms are experimenting with this in other parts of the world. But coming back to my point earlier about innovation and behaviour, is one thing that we absolutely know is that too much choice for many people is a real turn off. And so what we've seen going back to automatic enrollment and pensions is not just automatic enrollment in the sense that we have taken, I think it's 12 million people now and effectively told them that they're in a pension scheme unless they tell us otherwise. But it hasn't stopped there because we've discovered that once in a pension scheme, many people don't feel equipped to make an investment decision and are very happy to rely on what we call a default option. Now, that doesn't mean that you shouldn't try and provide information, education, to empower people over time to be able to make more decisions for themselves. But it goes back to some of these behavioral things, which is that we often imagine this world of millions of investors who are queuing up to look at all the information, make a series of decisions, build their portfolios, but we just know that we're not like that as a species. And so I think the industry as it innovates is going to have to think about accommodating all of these different preferences. And the beauty of technology is that we can. We can build defaults, and we can build defaults that are potentially quite dynamic as we think about changing opportunities to invest in different asset classes or different market conditions. And again, we do that already, but we can do it with greater degrees of efficiency, and but at the same time, we can also think about some of that more customized approach for those that do want to go down a different path.

SPEAKER_00 26:23

Certainly exciting times ahead.

SPEAKER_01 26:25

Yeah.

SPEAKER_00 26:26

Um so in this discussion, we've set out the vision, if we can call it that, of where we might be heading. So let's speak for a moment about the the potential obstacles. So, what might prevent the industry from innovating in the way that we've been uh we've been talking about? And of these bloggers, what can we do about them so that they don't get anyway?

SPEAKER_01 26:51

Yeah, this is such an important question, but it's also such a complicated question in terms of why people do things at at different times. And obviously, there are individual calculations that firms will make at any given moment, depending on where they are in their commercial cycle, where they are in terms of thinking about their broader development. But there are a few things that that really matter, and just sort of thinking about the question of why people do things and why they don't do things. Sometimes it comes down to capacity and just having the space to think and the resources to develop. And there's a great cartoon that you may have seen. Um, I know I've used it a few times in presentations over the years, and there are a couple of cavemen pushing a cart with square wheels, and there's another caveman running up behind with a pair of round wheels, getting something to the effect to guys, you know, do you not think that this could help you? And the caption is thanks, but we're too busy. And I think there's a more serious point there, and it's not you know specific to the investment management industry, but it has affected the investment management industry, is that if you look at the last 10 years, what we have gone through in terms of big macro events. So for the UK, we've had Brexit, we had the COVID crisis, to some extent, also there was adjustment with uh the Russia invasion of Ukraine and responding at a variety of levels to some of the sort of practical challenges. Overlaid by a decade of regulatory change. This isn't a comment on regulators, it's just a statement of fact. We went through MIFID, we went in the UK through a series of competition studies, we then went into consumer duty, we've then been doing work on sustainability. It's a busy agenda, and it's a busy agenda for everybody. And then if you overlay that with what's been happening in the world of tokenization and over the last sort of two to three years, but particularly over the last 18 months, in the world of large language models and AI, what I think everybody, everybody in financial services, industry, regulators, government, but also I think societally is struggling to actually just keep up with how much is happening and to grasp the full potential. So that's the the first point. I think the second point though is you can carve out the time and the space, but then it becomes about alignment. And not everything that the industry wishes to do is in its own control. So I think you alluded to obstacles and other things that we have to do. And clearly, when you want to engineer public policy change, you need to make sure that a number of stakeholders are on side, from government and regulators all the way through to distributors, advisors, customers. And what I'm really pleased to see over the last couple of years in particular on the innovation beat is a very tangible sign of alignment between government regulators and industry on the need to get this innovation process right. So if you look at the way that our IF3 now is working, or if you look at the way that we're working in the investment management task force, its latest iteration now has a technology working group that is imagining how the world will look for retail investing in in five years' time. You have got everybody around the table because everybody is now prioritizing and recognizing the shared stakes in getting this right. So I would see that as very positive. But it's not a given that there will be that alignment, and we certainly haven't necessarily seen that alignment at at all times in the recent past. And then I think as an industry, it's also about how you rebuild, or indeed how you build for the future, where there are so many moving parts. I mean, let's just leave AI aside for a moment and just talk about tokenization. And people say, oh, we've been talking about tokenization for ages, it doesn't seem to happen. It's like, well, actually, it is happening. But I think again, if you went back to periods of extraordinary technological change and dislocation, you probably see something similar happening to what's happening today, which is that it's not clear at the beginning exactly what you have to do. And it's not clear exactly how it's going to turn out. And an example we often use on tokenization is the example of the railways in Britain in the late 19th century. And I use that example because as we're talking, we are a couple of minutes from Liverpool Street, but we're not that far from Fenchuk Street, which in turn is not that far from Cannon Street, which in turn is not that far from London Bridge, Blackfriars, and then you're over to Charing Cross, Embankment. How many stations do we need as major terminus buildings in London? Well, the answer is probably not as many as we have today. But in the late 19th century, people wanted to have a railway line and a station. And for a period of time, it did feel quite unstructured and quite disorderly. And and the read across to tokenization is not just about that sort of lack of clarity, but there's a there's a there's a real issue here about private chains versus public chains. And if you're on a private chain, then you have a multiplicity of private chains, and then you have an issue about interoperability. And it isn't unlike actually uh what we saw in the uh the railway era 150 years ago. But there are also a lot of other moving parts in tokenization. We think about uh building tokenized funds, but then you have to think about how money moves through a tokenized system, and then that takes you into questions around digital currencies, the role of stablecoin. Are we going to have a central bank digital currency? So I think some of you know what we often see are obstacles and frustrations, are partly just a feature of incredible change. And that obviously doesn't minimize the frustration sometimes, or are impatience at not being able to move things more quickly. But I think if you put all of these factors together, you you kind of get a sense of what's going on. You have a lot of people in industry who really do want to make the time, who understand that this isn't optional, it's not about sort of stepping out of the day job, it is about transformation. But sometimes when you look at what we've had to do over the last 10 years, that has been difficult to focus. But then using the alignment that exists at the moment to effectively prioritize and be able to see the wood for the trees. And I'm hoping we will get there uh sooner than than than than many anticipate. But it is uh to use an old cliche, it is a marathon rather than a sprint.

SPEAKER_00 34:55

To start to wind things up on. I think we could have sat here all day talking about this stuff, but alas we can't. Uh John, thank you so much. That's been a really fascinating discussion, so much to think about in there. Maybe just to close, could you tell everyone listening, uh, and in particular IA members, how they can start to engage with the investment association, get involved in some of our innovation work.

SPEAKER_01 35:21

Yeah, so for for our for our members, there are a lot of different work streams to get involved in. I've already talked about the Investment Fund 3 lab. We also have a fintech accelerator and broader community called Engine. We have a whole range of policy work streams, but I really want to go back to a point I made earlier that is sort of burnt into our strategy about engagement beyond our immediate community, and also a point I made about innovation, which is it's not just what you try to do, but how you do it, which means that we are really interested in talking to everybody with an interest in investment management and in innovation. And so beyond our members, I think the message from us is that this is an incredibly exciting time of change, and we're very keen to encourage people to reach out if you'd like to be part of the conversation.

SPEAKER_00 36:20

Fantastic. Jonathan, thank you very much, and thank you everyone for listening. Please do join us again as we have more episodes on the way.