The Investment Association systemic risk response: “It’s not how big you are, it’s what you do with it”
The Investment Associations response to the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) second consultation on investment managements systemic importance proposes a fresh approach to the identification and neutralisation of any systemic risks that could arise in the sector.
The Association insists that the right approach is to focus on activities that might give rise to dangerous levels of interconnectedness and leverage, rather than firm or fund size, which, it argues, is a useless tool for identifying systemic risks in investment management.
The Association agrees that protecting the financial system and the economy more broadly from financial instability is of utmost importance, but is categorical in its insistence that the framework born out of the financial crisis to tackle the ‘too big to fail’ issue regarding banks is unsuitable for the investment management industry.
The size of an investment manager is in no way an indicator of systemic importance. This is because investment managers operate as ‘agents’ for their clients. This means that investments are not held on the investment manager’s balance sheet but are owned by clients themselves, thus separating the fate of a manager from the fate of customers’ investments. Even if an investment manager does ‘fail’, the investments in a fund remain segregated and can be transferred elsewhere without clients’ money ever being at risk.
In addition, the Association has provided policy makers with evidence that shows that investors do not substantially withdraw from funds during periods of financial instability or market turbulence. There is also no evidence of ‘herding’ or of ‘fire sales’ caused by significantly higher redemptions than normal.
Richard Metcalfe, Director of Regulatory Affairs, 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.”
The Investment Association’s response can be viewed in full here.
