Asset managers under threat as regulation mounts

Asset managers under threat as regulation mounts

Asset managers are likely to find themselves buried under even more regulation in years to come after an International Monetary Fund paper raised questions about the sector’s systematic risks, experts have said.

The institution’s paper on the asset management industry and financial stability covered various issues it believed needed to be raised and potentially regulated against.

It suggested there were limitations in the level of oversight of the industry now, claiming it was “not set up to fully address risks, neither at the institutional nor systemic level”.

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The report also said regulation was “lacking in specificity” with regards to liquidity requirements and liquidity risk management, adding supervision of funds and asset managers was “generally weak across jurisdictions”.

“In many jurisdictions, oversight of funds has been focused on disclosure to protect retail investors,” the report said.

“Regular supervision of risks is generally not the focus of supervisors. As a result, no financial soundness indicators have been developed for the industry, and stress testing of funds and asset management companies by regulators has been rare – a major contrast with bank supervisory practice.”

Monica Gogna, investment management partner at law firm Ropes & Gray, contended many of the IMF’s concerns were already being addressed.

“What I would question is whether the IMF is acknowledging what has already happened,” she said.

“When you look at liquidity, for instance, we have things in Europe like the Alternative Investment Fund Managers Directive (Aifmd), which was brought in to look at the regulation of managers, and there is also a directive on money market funds being discussed.”

But when asked if she thought there would be more regulation, she said “I think yes.

“This is a clear indication there is still a very large appetite for continuing regulation of the asset management industry.”

She added: “But I would question how much more regulation the industry can take.”

Tom Huertas, head of EY’s global regulatory network, agreed asset managers were “already subject to extensive regulation, particularly with respect to market conduct”. He added: “Traditionally, asset managers have been practically exempt from prudential regulation on the grounds that end investors, not the asset manager, incur the risk and reap the reward in the portfolios selected by the asset manager on behalf of the investor.”

But he hinted at potential issues on liquidity.

“Policymakers are concerned that asset managers may be making promises, particularly with respect to liquidity, that they are not able to fulfil,” he said.

“Regulators are asking how asset managers can keep promises to maintain a constant unit value or to redeem funds on demand at net asset value, if the underlying assets in the fund are illiquid and the demand for redemptions is high.

“Asset managers therefore need to provide a convincing answer to that question if they wish to avoid prudential regulation.”

Iain Anderson, chief corporate counsel at Cicero Group, said the IMF paper “pointed towards the regulatory architecture it wants”.