The weight of financial sector reform has made regulatory risk the number one concern of chief risk officers (CROs) at asset management firms, according to a new survey from consultancy group Ernst & Young.
The firm’s Risk Management for Asset Management 2010 survey, based on interviews with 29 head of risk and CROs at European asset management firms, also revealed a notable increase in respondents’ desire to optimise capital and liquidity.
In addition to long-held concerns about the impact of the UCITS IV directive, survey participants identified a number of risks relating to the Alternative Investment Fund Managers’ Directive (AIFMD) and other forthcoming reforms. A total of 76% of asset managers expressed concern that the current draft of AIFMD would prevent the selling of products into the European Union/ European Economic Area from third countries, while the same proportion voiced fears over the future cost of liability insurance.
E&Y said the volume and complexity of new directives and regulatory measures facing asset management firms were “near overwhelming”, citing both Group of Twenty (G20) sponsored initiatives and regulatory measures being introduced by prudential regulators and competent authorities.
The firm observed that principles-based or market-led approaches were increasingly giving way to a return to rules-based regulation. It added that regulatory measures such as UCITS IV, the proposed AIFM directive, proposed reform of ratings and OTC derivatives, the MiFID review and short-selling restrictions “might require ever-closer coordination or even integration between the risk and compliance functions”, according to the report’s executive summary.
The survey also found that asset management firms are very focused in internal capital adequacy assessment processes (ICAAPS) and are looking to optimise capital provisioning, particularly in light of continued liquidity challenges.
“To a large extent, the G20, the central banks and the prudential regulators are all acting in a concerted manner to manage liquidity risk and avoid pro-cyclicality at all costs,” noted Dr Anthony Kirby, director of Ernst & Young’s regulatory and risk management practice. “However, the current evidence is that the Financial Services Authority (FSA), the UK’s financial sector regulator, in particular is placing more focus on risk appetite and linking the risk framework to strategic decision making. This includes requiring managers to provide a sufficiently detailed explanation of (and justification for) the methodology adopted and the conclusions reached.”
E&Y’s 2010 risk management survey confirmed that counterparty credit risk management was still a concern to asset managers with 45% claiming to be able to break down exposures by counterpart and product, however only 14% of respondents said this could be done intra-day. Initiatives introduced since the collapse of Lehman Brothers heightened counterparty credit risk concerns in Q4 2008 include centralised approval of counterparties, increased vigilance when monitoring segregated client mandates or assets and active management of counterparty credit risk by investment managers.