US fund managers have launched a new attack on global regulators as they fight a rearguard action against possible rules that would treat groups such as Fidelity and BlackRock as threats to the financial system.
The Financial Stability Board, a global watchdog chaired by Mark Carney, governor of the Bank of England, is exploring whether to designate the biggest asset managers as “systemically important” and hit them with tougher rules and heightened scrutiny.
But Fidelity said the FSB’s approach was “irredeemably flawed” and told regulators in a letter that regulating a fund manager as systemically important “would be counterproductive and destructive”.
Fund managers argue that they do not pose systemic dangers to financial stability because they do not take deposits, guarantee returns or face the risk of sudden failure like a bank.
But regulators have other concerns. Last month Mr Carney highlighted the risk on investor runs on “funds that offer on-demand redemptions but invest in less liquid assets”. The watchdogs are also looking at the stability impact of securities lending by asset managers, and the complexity of fund businesses structured as holding companies, which bear a growing resemblance to banks.
Empowered by the leaders of the G20 top economies, the FSB has designated 30 banks and 9 insurers as global institutions that require tighter regulation because of their potential to cause systemic contagion.
Next in its sights are asset managers, although the FSB, which is based in Basel, Switzerland, is debating whether it makes more sense to regulate entire institutions or particular products and activities.
Fidelity and the Securities Industry and Financial Markets Association (Sifma), a US trade group, accused the FSB of ploughing ahead while ignoring an avalanche of empirical studies and previous industry comments.
BlackRock, the world’s biggest fund manager by assets, was less aggressive and said there was a case for enhancing the regulation of some individual investment products and practices.
European asset managers are more relaxed about the FSB’s work as they are smaller than the biggest US groups and less likely to be targeted. Axa of France said it had not written to regulators.
The industry is privately concerned about how new rules would affect their profitability and competitiveness, although in public they emphasise how customers would be harmed by new regulation.
It’s very clear that asset management activities can create systemic risk. I don’t think there should be any debate about that. The question is how best to address it
– Marcus Stanley at Americans for Financial Reform
Advocates of reform say the asset management industry’s claims to pose no threats to financial stability are hollow.
Marcus Stanley of Americans for Financial Reform, a group that wants tougher regulation of Wall Street, said: “It’s very clear that asset management activities can create systemic risk. I don’t think there should be any debate about that. The question is how best to address it.”
He said asset management was closely tied to the devastating 1987 stock market crash, the collapse of the hedge fund Long Term Capital Management in 1998, and the panic that spread through short-term money market funds in the last crisis.
Sifma said in a letter that the FSB’s approach “could lead to increased costs and other negative consequences for investors and capital markets without actually addressing any systemic risk concerns”.
The FSB has not set a deadline for its work and says it has not prejudged its outcome.
Additional reporting by David Oakley in London and James Shotter in Frankfurt.