US buyside lobby renews hostilities with FSB

Mark Carney at the World Economic Forum

Bank of England Governor Mark Carney chairs the FSB

The Investment Company Institute on September 21 baulked at a number of the recommendations made by the FSB’s June consultation designed to “address structural vulnerabilities from asset management activities”, arguing that its underlying understanding of the fund management sector was lacking.

In its response to the FSB, the ICI said: “Flawed processes have the potential to lead to bad policy outcome – for example, the imposition of ill-suited, harmful and/or costly regulatory requirements that lack a sound, evidence-driven policy basis.

“Bad policy outcomes, in turn, may have harmful implications for the financing of the economy, for growth, for markets, and for the lives of real people whose financial wellbeing is at stake – hardly the results a ‘financial stability’ policy body should be seeking.”

The ICI also called on the FSB to step aside from this body of work and instead allow the International Organization of Securities Commissions to “take charge of further work on asset management activities at the global level”. The FSB had said in its consultation that it would delegate some regulatory responsibility to Iosco, but the ICI instead urged Iosco and other capital markets regulators to assume complete responsibility.

The ICI has previous issues with the FSB, having been a staunch critic of its bid to designate asset managers as “systemically important financial institutions”, a move that the FSB and Iosco hit pause on last year.

The ICI welcomed both the “evolution” in the FSB’s approach to focus on activities rather than singling out individual funds or assets managers, which would have been the case with its Sifi approach, and its decision to delegate the shaping of reforms to Iosco and national regulators.

The group said such an approach “properly directs these important responsibilities to the regulators that have the requisite expertise and hands-on experience with respect to asset management activities and the capital markets”.

The FSB, which is chaired by Bank of England Governor Mark Carney, flagged four issues in June it felt could pose “potential financial stability risks” to the investment sector. These encompassed a liquidity mismatch between investments and redemptions for open-ended funds, fund leverage, challenges transferring mandates in stressed conditions and securities-lending activities.

In particular, the spate of suspensions in the UK’s open-ended commercial real estate funds as a result of investor panic and a lack of liquidity following the Brexit vote in June brought concerns around some fund structures to the fore.

ICI’s president and chief executive Paul Schott Stevens told Financial News of the change in the FSB’s approach away from a Sifi-based focus in its asset management work: “From that point of view, the focus and the process is more promising. But the reality is that underlying the recommendations, many of which we don’t find particularly troubling, is the stubborn disregard the FSB has had from the beginning of this work for any evidence-based approach to these issues.

“It continues to plough speculation upon speculation. I don’t think they will ever come up with sensible policy recommendations until they come to grips with the real-world experience of asset managers.”

He said the FSB cannot distinguish asset managers from banks. He added: “They have taken the literature of bank runs without taking into account the historical experience of funds and their managers.”

The FSB, which declined to comment, is planning to finalise its recommendations by the end of 2016. It said in July 2015 that its work on methodology assessing non-banks’ Sifi designations would be shelved until this body of work on structural vulnerabilities in the sector as a whole was complete.

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