FCA warns of financial stability risks from investment manager failure

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The FCA has warned of the systemic risk of the failure of an asset manager as it builds on this year’s industry study in its Mission and Business Plan 2017/2018.

It also raised concerns about the cost of services, custody banks not having the incentives to improve legacy systems, and products not designed to meet end investors’ needs.

The concerns raised were additional to those raised in the Asset Management Market Study, which was released in March.

This year is the first that the regulator has included sector views in its annual business plan with pensions, retail investments and investment management among the sectors covered, alongside retail banking, general insurance and wholesale financial markets.

It raises concerns that the failure of an investment manager or even a portfolio could disrupt the financial system.

Market stability could be affected by the failure or disorderly wind-down of a very large asset manager or several asset management firms as end-investors attempt to redeem their holdings on demand, creating a downward selling spiral,” the document states.

Investment management areas of focus for FCA

In addition to topics covered in the Asset Management Market Study, the FCA highlights the following additional areas of focus for the investment management industry:

  • Overpayment of some investment management services Some investment managers may pay too much for services on behalf of investors due to: lack of transparency of information regarding some fees and charges failure to consistently monitor, assess and deliver on ‘best execution’
  • The ability of custody banks to meet current service standards or ensure continuity of service Because of business model pressure and the relatively low margin nature of this business, the incentives to invest and replace legacy IT systems may not exist.
  • Product design and oversight of portfolios Providers focus on designing investment products that are easy to manage, or suit advisers, rather than delivering products that meet end-investors’ needs.
  • Disorderly failure of investment managers and/or their portfolios could disrupt the financial system Market stability could be affected by the failure or disorderly wind-down of a very large asset manager or several asset management firms as end-investors attempt to redeem their holdings on demand, creating a downward selling spiral.