Managers may be inviting eurozone compensation claims
Experts warn reducing exposure is not enough to prepare fund managers for worst-case scenario in Europe.
Fund managers may be leaving themselves open to compensation claims if they do not adequately prepare for further developments in the eurozone crisis, experts have warned.
Rory Gage, director at consultancy firm Navigant, said the cost and work involved in complying with UK, European and international financial regulation meant fund management companies had not given due consideration to the effects on their business of a breakup of the euro.
“Managers have mainly been divesting of assets in Greece and banks but they are missing something big,” Mr Gage said.
“What happens if a portion of a fund becomes untradeable? Will trades become unable to be completed if European investment banks get into difficulties?”
Richard Frase, partner at law firm Dechert, added that in the event of a disorderly Greek exit from the euro, stock exchanges may be suspended and prices may move “dramatically” making it harder for firms to value the assets in their funds.
He likened the liquidity problems that could potentially affect funds to the crisis of 2008, which saw a range of property funds suspended as asset prices plummeted.
The FSA has written to fund managers urging them to ensure they are prepared for continued instability in the eurozone, Mr Gage said, meaning managers “can’t say these events were unexpected”.
The regulator’s action also means investors could have “a good case for compensation” if measures are not taken to protect against adverse effects of a eurozone breakup, he added.
Mr Frase said managers also needed to consider whether investment policies could and should be altered to allow more discretion, particularly regarding minimum credit ratings of fixed income investments.