Asset managers and regulatory analysts have questioned the effectiveness of the Financial Stability Board’s (FSB) latest recommendations at addressing systemic risk.
As part of an ongoing consultation, the global regulatory body chaired by Mark Carney published 14 recommendations last week, including a push for asset managers to provide investors with more information about how they manage liquidity and leverage in open-ended funds.
This included proposals that asset managers should inform investors of any liquidity mismatch in their portfolio, and of any liquidity controls in place and under what circumstances they would be used.
The recommendations are part of the FSB’s wider work on the systemic risk of large asset managers. It represents a climbdown from original proposals to impose capital requirements to ensure firms do not pose a systemic risk in stressed markets, with liquidity of underlying investments a key concern.
But some suggested the FSB should put greater pressure on ensuring asset managers work in the best interests of investors, rather than a focus on liquidity.
Daniel Godfrey, former chief-executive of the Investment Association, said the FSB recommendations, while potentially effective, would come at too high a cost for investors.
He said: “Liquidity is only a risk if you need liquidity. Investors don’t; they just think they do and this obsession causes lower returns and potential systemic risk. Will the proposed remedies work? Maybe, but almost certainly they will reduce returns as the price of creating ‘insurance’ against the long-tail risk event.”
Others welcomed the report and the FSB’s move towards a more light-touch approach, and its commitment to looking at the industry as a whole rather than putting pressure on a few large and influential funds or firms.
Sean Tuffy, head of regulatory intelligence at Brown Brothers Harriman, said: “I think the FSB’s policy recommendations will be generally welcomed. It has shifted away from the idea that large funds or managers can present a systemic risk and instead focused on activities. This has been the industry’s argument the whole time.”
He said the liquidity measures recommended in the report were broadly in line with regulators’ existing thinking, as many of the FSB’s suggestions are included in the US-based Securities and Exchange Commission’s liquidity proposals.
“A lot will depend on how these guidelines are implemented at the national level. But overall I think this is a positive step.”
The FSB report encouraged authorities to consider the possibility of using a system-wide stress testing of funds to assess their resiliency, and that of the industry as a whole, in the case of a sell-off.
However, some members of the industry questioned what this stress testing would look like in practice, and whether it would be enough to gauge the financial vulnerability of asset managers.
Nick Fienberg, director at consultancy Alpha FMC, said: “The question remains exactly what stress testing the industry would look like and how it would operate in practice. There are so many different kinds of funds holding a wide variety of different assets in the UK, so we must ask whether a uniform stress test can be designed that will allow us to effectively compare results between them.”