Regulators list priorities for resilient post-pandemic financial system
While the financial system survived the Covid-19 triggered market volatility in March 2020, certain parts of the funds sector were impacted. The interventions of the central banks globally averted more negative impacts of the economy. Before this intervention, there were redemption stresses in Money Market Funds and in less liquid open-ended funds, consistent with first mover dynamics, said Derville Rowland, director general for financial conduct at the Central Bank of Ireland, at the Irish Funds annual conference titled Accelerated Transformation – disruption and opportunity.
While other factors such as margin requirements were also at play, Rowland noted that under stress, these parts of the funds sector did not absorb the shocks but rather transmitted and amplified the stress. For this reason, money market funds and liquidity management practices in the funds sector are currently under consideration, as the Central Bank of Ireland is working along with Financial Stability Board (FSB) and IOSCO.
The Covid-19 experience has stressed upon the need to develop and operationalise a macroprudential framework for investment funds, said Rowland. “The absence of such a macroprudential framework for investment funds remains, in our view, a key omission in the European regulatory toolkit,” she added. Domestically, the Irish central bank is carrying out a framework review on the three pillars of its macroprudential regime: mortgage measures, bank capital regime and market-based finance. “In the latter area this may include measures such as leverage limits and options to limit liquidity mismatches, to strengthen the fund sector’s overall resilience to potential future shocks,” added Rowland.
Focus on liquidity management measures:
The Central Bank of Ireland’s focus is also on the resilience of funds and firms, said Colm Kincaid, Director of Securities and Markets Supervision at Central Bank of Ireland. “The three key themes are the need for better implementation of framework for fund management companies and governance, firms must be proactive and better organised on how they manage liquidity risks and the need for better data quality for identification of risks,” he added. Colm warned that firms should not fall into the trap of complacency after surviving the 2020 crisis. “The next crisis may not have this level of global government and central bank support. Firms need to act on these points today,” he said.
European securities regulator, European Securities and Markets Authority (ESMA) has been working on liquidity management on open-ended funds. Evert Van Walsum, head of investors and issuers department, said, “Esma monitors and collects data on liquidity management tools by money market funds, Ucits and AIFs as a follow-up of the Covid-19 crisis. There has been a common supervisory action on liquidity risk management in the Ucits area, initiated based on the risks flagged by ESRB recommendations based on stress simulations. While the results showed overall compliance with Ucits rules, there was scope for improvement and more convergence in certain areas. There was also a stress test simulation on corporate debts on Ucits and real estate funds in AIFs, where priority areas for future work have been identified.”
'Value' of investment products:
Performance and costs of retail investment products is another area which Esma has highlighted as its priority. In a similar vein, British regulator, the Financial Conduct Authority (FCA) has started a value assessment, which requires UK authorised fund managers (AFMs) to assess the overall value that their funds deliver to investors and publish a summary of these assessments annually. The value assessments started as a result of a market study in 2017, where ongoing process of fund governance is sought to ensure that the product fits the customer over time. Nick Miller, head of asset management at the FCA, said that there has been a promising start to this effort, with real attention by funds’ boards on this subject. “There are a number of issues that funds need to pay more attention to, such as the question of management fees, of value and economies of scale,” he added.
On concerns of greenwashing by funds, Miller said that the FCA expects funds to be clear and articulate their strategy when they seek authorisation. “We are seeing firms failing to do that and there is a lot of conversation is needed. Fund managers have a need to control and govern this process. How is this ESG product different from a standard product? There are firms bringing some good product, but it is not good enough,” he said.