In an interesting turn of events, the Financial Stability Board has recently announced a change of direction in its post-crisis regulatory approach by confirming that it will no longer single out the world’s biggest fund managers as having the potential to pose a systemic risk to the global financial system.
Whilst this doesn’t create the opportunity that smaller managers thought it might — there were those who were hoping to take advantage of a more level playing field caused by bigger managers being tied-up with additional red tape — it is certainly good news for the fund management industry as a whole, providing the industry with a little breathing space whilst global regulators go back to their respective drawing boards in their pursuit to mitigate the greatest dangers to global economic stability.
The wider question is whether or not the investment fund industry as a whole poses a systemic threat to the world economy: a question that has divided both academics and commentators alike. A chief concern is that the fund management industry might amplify market disturbances, in the event that investors attempt to withdraw their capital at the same time. In my opinion, such a run on accounts would be highly unlikely to occur again; I would expect the majority of sophisticated managers to have already amended their funds’ offering documents to allow them to implement gates and broad suspension rights at such times of stress. Of course, this is only one piece of the regulator’s puzzle, but it serves to highlight a potential disconnect between theoretical implications based on an outmoded understanding of the fund management industry and reality.
As always, we’d be delighted to hear your thoughts.