If there is one lesson to be learnt from the banking crisis it is that tax payers should not bail out the financial services industry again. It is vital that banks have sufficient liquidity and resolution plans in place to wind down without taxpayers losing a penny. That’s why we are pleased to see the Financial Stability Board committing serious time and effort to ensuring banks have suitable recovery and resolution plans in place. However, we have reservations about including asset managers in this regime – it would add expense and complications without offering any additional safeguards.
The FSB’s intended target is defined as any “financial institution that could be systemically significant or critical if it fails.” It is right that regulation should focus on those institutions whose insolvency poses the greatest risk to financial stability and asset managers quite clearly do not fit into this category. The structure of the industry means that managers are completely detached from the assets they manage, thus client money would remain protected, in the hands of the custodian, should a fund management firm become insolvent. Furthermore, as an agency business model, all EU asset managers already have comprehensive wind-down plans as part of their prudential regime; in the UK this is enforced by the FSA’s Individual Capital Adequacy Assessment Process. We are urging the FSB to consider the fact that not a single asset management firm failed as a result of the financial crisis and, unlike the banks, no government hand-out was required.
The asset management industry is a tightly regulated, highly transparent one that plays a stabilising role for the economy. No further recovery and resolution tools are necessary, as they would increase cost, administration and complexity with no evident benefit to the general financial well-being. This is recognised in the capital requirements outlined in various EU directives such as Ucits and AIFMD. We hope that regulators will recognise this and ensure savers are protected by comprehensive recovery and resolution plans for all systemically important firms.
For such firms, e.g. banks, this regulation is vital and I’d like to see it go further in its scope. So far the focus has been purely on protecting consumer deposits; we must not forget that banks also provide some services which are critical to the effective functioning of the investment management industry who are in turn responsible for £4.9trn of investments and pension savings. It is every bit as important for consumers that these critical functions provided by banks are safeguarded by robust recovery and resolution plans. Managers rely on banks to assist with their payment, settlement and clearing processes, wholesale activities and capital market activities. It is in the interests of the industry and investors that these processes are able to continue should a bank get into difficulty. Services around payments, clearing and settlements are often provided by a separate arm of the bank, e.g. broker dealers, so it is vital that banks’ recovery and resolution plans cover those services provided in the name of the bank.
Irving Henry is prudential specialist at the Investment Management Association