The FSA has published a speech by Hector Sants (Chief Executive, FSA) entitled Impact of the credit crunch on asset managers.

Mr Sants begins his speech by stating that economic and market cycles are inevitable and that a downturn was expected by commentators and regulators. Whilst a correction of risk pricing was foreseeable the collapse of investor confidence and the liquidity squeeze was not. According to Mr Sants the loss of investor confidence was, in many ways, due to a lack of transparency and understanding, with sellers and buyers selling or buying products they don’t understand.

Mr Sants then focuses on the following points in his speech:

  • Impact of the credit crunch on asset mangers. Here Mr Sants states that asset managers appear to have weathered the credit crunch fairly well when compared to banks. A key reason for this is the segregation of client assets. Most of the problems experienced by asset managers have been related to how they conduct their business. He further states that in the January 2008 Financial Risk Outlook, the FSA highlighted a number of priority risks and that some of these risks have crystallised in asset managers. Mr Sants sets out three lessons for asset managers to consider and these are:
    • Senior management should take seriously their responsibility to establish and implement appropriate systems and controls. This is especially important when firms are running more complicated funds and products, as well as investing in more complex assets. Management needs to carefully consider any headcount reduction exercise that could compromise essential functions, especially those in roles such as operations, risk and compliance.
    • Market shocks can emerge unexpectedly and bring large repercussions. Firms need to ensure these stresses are being built into their capital adequacy assessments and the FSA will be actively considering these in its current and future evaluation of ICAAPs.
  • Hedge funds. Mr Sants states that what has been highlighted so far is the importance of monitoring redemption risk profiles and managing mismatches between funding/notice periods and the underlying liquidity of funds.
  • Outcome based regulation. Mr Sants states that the credit crunch has reinforced the view that a principle and outcome based approach to regulation is the way forward. He also states that a considered review of questions such as whether customers are being treated fairly, whether conflicts of interest are being managed appropriately and whether business risks are being managed, should be the norm in a more principles based regulatory environment.

Mr Sants then discusses the treating customers fairly (TCF) initiative stating that the FSA’s main message is that it expects firms to be able to demonstrate that they are treating customers fairly by the end of the year using appropriate management information. The FSA will be proactively assessing this during the first half of 2009. Mr Sants then discusses the good practice guidelines for UK authorised collective investment scheme managers which the FSA published in January 2008. From the summer of 2009, as part of the FSA’s revamp of its overall supervisory procedures, it will embed its TCF strategy within its normal supervisory framework. TCF will then become part of the FSA’s ongoing conduct regime.

The FSA also remains committed to driving forward its key initiatives to tackle financial crime and to use all its powers at its disposal (civil, criminal and administrative) to combat market abuse and insider dealing. Quality of markets. Here Mr Sants states that recent events have also raised questions as to how regulators address the issue of ensuring the quality of markets. The FSA has already looked at the efficiency of capital raising in markets and is considering further transparency in terms of the disclosure regime for general insurance firms. Mr Sants gives two recent examples:

The FSA has made regulatory interventions in relation to contracts for difference (CfDs) and short positions in stocks where the issuer is undertaking a rights issue. On CfDs, the FSA believes that enhanced disclosure is required to address market failures around access to voting rights, corporate influence and undisclosed stakebuilding. The FSA will be publishing its final rules on this shortly.

In terms of short selling Mr Sants refers to the short selling disclosure regime which was introduced in June 2008. The regime is designed to mitigate the risks of abusive behaviour occurring in the trading of shares in firms undertaking rights issues.

In his concluding remarks, Mr Sants states that the FSA welcomes the European Commission’s recent proposals to revise the UCITS Directive to further enhance the efficiency of Europe’s fund management industry. The FSA also supports the work that the Committee of European Securities Regulators has done on the management company passport.

View FSA speech - Impact of the credit crunch on asset managers, 17 September 2008