Asset managers under threat as regulation mounts
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”.
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”.
“Only really in the past 18 months to two years have regulators like the IMF started to look to the global systemic significance of the asset management sector.
“What we are seeing from the IMF is a further push out of that trajectory. There are very significant flows that are outside the banking system now and in the asset management one.”
Industry critical of IMF assessment on asset management stability
The work by the International Monetary Fund raises some important issues at a time when asset managers are playing a far greater role in assets globally.
The IMF said the industry now “intermediates assets amounting to $76trn (100 per cent of world GDP and 40 per cent of global financial assets)”, showing there is a need to be aware of the sector’s significance.
Richard Metcalfe, director of regulatory affairs at The Investment Association, said the paper was “reasonably balanced” but pointed to the fact it was slightly “US-centric” in its focus.
He also said work by other bodies including the Financial Stability Board and International Organization of Securities Commissions, cited by the IMF, often highlighted issues of leverage, which “introduced different dynamics than in the unlevered world of Ucits”. Mr Metcalfe agreed a focus on liquidity was important, however, added the “idea that a huge behemoth [fund] could turn on a sixpence” was highly unlikely.
“They don’t work like that,” he said.
The director added regulatory work in Europe had already moved to tackle issues surrounding central clearing and derivatives, all aimed at making the market more transparent.
