Fund managers’ lobbying on regulation backfires

PUBLISHED : Thursday, 21 August, 2014, 10:06am
UPDATED : Thursday, 21 August, 2014, 10:06am

Fund managers may face tougher scrutiny by global regulators after their intense lobbying against an initial proposal backfired, industry sources and G20 officials said.

A global G20 task force is rethinking its initial approach, which involved targeting the biggest funds, and could opt for a more intrusive method that would affect more funds by limiting their market activities during periods of turbulence, sources said.

The plans are part of an international effort to prevent financial crises.

“The industry fears it may have shot itself in the foot as FSB (the Financial Stability Board) is coming back with an even more radical proposal,” a European asset management industry source said.

The industry fears it may have shot itself in the foot as FSB is coming back with an even more radical proposal
Industry source

“Since we argued that size is the wrong metric to use, the FSB is now looking at investment-driven supervisory tools.”

The Group of 20 economies (G20) in 2009 asked the FSB, its regulatory task force, to scrutinise big asset managers more closely as part of its remit to maintain financial stability. Until then, the focus had been on banks.

World leaders wanted supervision of all parts of the financial system reviewed after the 2007-09 financial crisis resulted in taxpayers having to bail out many banks, at a cost of trillions of dollars.

The FSB proposed in January that individual funds with more than US$100 billion in assets should face tougher, yet-to-be-detailed scrutiny. That threshold would have captured 14 funds, all in the United States.

The industry responded by saying the FSB proposals, which focused solely on the size of funds, were too simplistic. It questioned why fund managers were being targeted since, it argued, they were not responsible for the crisis.

Details of the new proposals are still sketchy, but fund management industry sources said the tools being considered included directly clamping down temporarily on a fund’s market activities in times of a crisis to ensure stability.

This could include curbs on inflows and outflows of a particular asset class like a government bond, perhaps through having to impose “gates” or redemption fees to avoid runs. Gates refer to temporary suspensions on taking money out of a fund, while redemption fees refer to a fee to discourage withdrawals in choppy markets.

“This would undermine fund managers as professional investors and lock pensioners and savers into losses,” the European funds official added.

Such intervention is already part of supervisory thinking on money market funds in the US and Europe.

The Investment Company Institute (ICI), a US funds sector lobby group, said in a 92-page letter to the FSB in April that it was “deeply troubled” by the logic of the original plans, that dramatically expanded the authority of bank supervisors.

A G20 source said the global funds sector had over-reacted to the FSB’s initial proposals and that a rethink was under way.

“The threshold was simply a threshold and just the beginning of a process of gathering more information. Market activity is clearly an area that is being looked at,” the G20 source added.

The FSB declined to comment ahead of a G20 summit in Brisbane, Australia, in November when the revamped plans will be discussed and later put out to public consultation.