Hold the line

Members of the Financial Stability Board have once again suggested that asset managers could be a source of systemic risk to the global economy but the UK’s Investment Association is having none of it. Joe McGrath investigates…

The Investment Association has moved to reject suggestions that asset managers are a source of systemic risk to the global economy.

The trade group – which represents UK investment managers with assets of more than £5 trillion under management – was responding to the Financial Stability Board’s CP2 consultation.

The consultation had asked organisations about the best way to assess non-bank and non-insurer SIFIs (global systemically important financial institutions).

In its response, the IA said both consultation documents released by the FSB have, so far, failed to provide enough evidence of the ‘moral hazard’ that exists from the asset management industry.

The IA response said: “We fail to see how moral hazard considerations justify this policy making concerning our industry.”

The SIFI framework was drawn up after the credit crisis of 2008 where certain banks such as Bear Stearns, Bradford & Bingley, Northern Rock and Lehman Brothers collapsed.

Numerous other organisations such as the UK’s Royal Bank of Scotland were deemed ‘too big to fail’ and were bailed out by their government.

An agency business

The IA argues that asset management is an ‘agency business’ and therefore assets are not on the manager’s balance sheet but owned by an investor.

In a statement to the media, released after the FSB’s Thematic Review report, Richard Metcalfe, director of Regulatory Affairs for the Investment Association, said: “The Investment Association does not say that systemic risks can never arise – just that they do not routinely arise in our industry and that size is not a valid indicator.

“It’s not how big you are, it’s what you do with it that counts. Where systemic risks may arise, they must be neutralised and we will be working closely with policymakers to ensure that an effective approach is adopted for our clients, for the financial system and for the industry.”

In its response to the consultation, the IA said: “Even if a manager, as an entity were to fail, the assets remain segregated and can be transferred elsewhere.

“Assets in collective funds are typically in the custody of a third party, the custodian or depositary, which is legally and functionally independent of the manager.”

The IA is lobbying for consideration to also be given to the implications of designating asset managers as ‘systemic’.

It said: “In the case of banking, potential policy tools were well understood – including, for example, additional capital requirements. This is not the case for asset managers and funds. It is far from clear what the appropriate policy measures should be.”

Market risk

In its response, the IA said the FSB should focus further analysis on market structure and distinguish ‘market risk’ from ‘systemic risk’. The trade body added that moves in asset prices usually indicate that a market is functioning and said that large falls in asset prices do not necessarily mean that a market is out of kilter.

As a result, the IA suggested that policymakers guard against implicitly targeting the price formation function of markets.

It added: “The FSB and IOSCO analysis of fire sale risk…. does not reflect that investor redemptions do not increase significantly in times of market stress – this is true of both retail and institutional investors. Evidence is cited in industry responses to both CP1 and the recent FSOC consultation.”

The trade group goes on to say that, in fact, the consistency of investment in managed funds has actually been a countercyclical force in past market turbulence, including the most recent financial crisis.