Financial services regulation continues to be reviewed following the crisis
On 15 and 16 November the G20 leaders met in Brisbane, Australia. Firmly on the agenda was the continuing reform of financial services regulation that the crisis precipitated. An unanswered question is how to assess the interaction of asset managers and funds with the system, while taking into account fundamental differences from banks.
The Financial Stability Board and International Organisation of Securities Commissions have been leading work to set global policy for reducing risks to financial stability posed by various types of institution labelled with the particularly ugly acronym, “NBNI G-SIFIs” (non-bank, non-insurer globally systemically important financial institutions). This has not yet demonstrated what is systemic or even potentially so.
The FSB-IOSCO initial public consultation closed in April this year, with a further consultation expected around Christmas/early 2015. As these standards are not legally binding, it will require the EU and US to legislate in their respective markets subsequently (usual practice with G20 reforms of financial services regulation).
Industry participants do not just have misgivings about “copy-and-paste” from banking regulation. There are potential pitfalls with designating manager or fund entities before determining the regulatory consequences. The better approach would articulate the tools to deal with the financial stability concerns at the same time as identifying the activities and products or entities that could give rise to these concerns.
Where fund risks might arise is where there is strong interconnectedness with banking. However, many of these threats are already neutralised, either by existing rules (via Ucits legislation) or by other post-crisis regulatory reforms addressing banking and markets. The FSB and IOSCO have not yet indicated how they will take account of this unprecedented wave of regulatory reform in their NBNI G-SIFI policy work.
Fund leverage should be a key marker of systemic significance. Funds without leverage or significant fixed obligations cannot attract runs and most funds employ little or no leverage.
The industry can expect the FSB and IOSCO to explore several regulatory “tools” to address concerns. They might ask for:
- New disclosure, transparency and reporting requirements – this may be an opportunity for globally consistent reporting of data relevant to financial stability.
- Enhanced crisis preparation by funds and managers (including a “closure plan” for the fund or manager that protects the investor from any disruption consequent upon the fund or manager failure).
- Some form of redemption controls to address policy maker concerns about mass redemptions.
Governments rightly promote investment and saving, and the role of asset managers is more prominent than ever following pension reform, demographic shift and constrained public finances. This public policy objective requires a competitive asset management industry and this requires the financial stability-motivated policy is calibrated appropriately.
Global standards on systemic investment funds are in the making; the funds industry hopes the methodology addresses activities and policy tools together.
Further consultation expected end 2014/early 2015
Implementation of any global standards would not be expected before 2016
Angus Canvin, senior adviser, regulatory affairs, IMA