The local funds management industry will come under increased regulatory scrutiny over the coming year under Financial Markets Authority (FMA) plans to conduct liquidity stress-tests, value-for-fee investigations and – maybe – recommend licensing for custody providers.
Among a long to-do list released last week in the FMA’s annual Corporate Plan and Strategic Risk Outlook (SRO) publications, the regulator says it would “work with supervisors to test the readiness of MIS [managed investment scheme] managers to respond to a liquidity crisis event” during the 2019/20 financial year.
Liquidity risks were highlighted this year after a high-profile UK fund managed by Neil Woodford halted redemptions. The FMA said earlier this month it was monitoring the unfolding Woodford drama but saw no particular parallels with the NZ market.
Bloomberg reported last week that the UK government was planning an industry-wide investigation in the wake of the Woodford scandal.
The FMA has further targeted an overall MIS “sector risk assessment” in conjunction with supervisors (aka trustees) this fiscal year with “follow-up actions” on the cards.
Fees once again feature on the radar but the regulator is looking to broaden the discussion in 2019/20 beyond its earlier review of KiwiSaver default providers.
“International work highlighting the lack of a clear relationship between fees, performance, and therefore value for money,” the SRO says. “This may warrant further exploration in New Zealand.”
KiwiSaver remains a high priority for the FMA, which will feed into the government’s five-yearly default scheme review due to boot-up in the next six months.
And the regulator should also soon make a call on whether to implement the 2017 International Monetary Fund (IMF) recommendation to licence NZ custody providers.
The IMF noted NZ was an outlier in not licensing custodians as well as highlighting a gap in the country’s regulation of wholesale funds. While the FMA has ruled out bringing wholesale funds under the retail licensing regime, the SRO says “we recognise that wholesale and retail investment management are interdependent”.
However, custody licensing will probably get the green light from the FMA with a final report on the matter expected within months.
Outsourcing in funds management also appears under a “long-term opportunities and challenges” category in the SRO.
“[The] prevalence of outsourcing of fund management and the lack of regulatory oversight in wholesale funds and custody arrangements mean that we may not have a clear view of some stability risks,” the FMA says. “Some of our concerns relate to smaller funds, which may lack sophisticated risk-management frameworks, and capability and capacity to manage outsourcing risks.”
Finally, the regulator has penciled-in a long overdue review of the discretionary investment management services (DIMS) regime in the year ahead. DIMS accounts for about $30 billion in fund under management in NZ.
“DIMS (discretionary investment management services) is a sub-sector where we will look to advance our knowledge of the population through targeted monitoring and additional information gathering,” the SRO says.
The document also references the Asia Region Funds Passport (ARFP), which officially went live in NZ last week after a lengthy delay putting regulations in place.
Under the ARFP, eligible fund managers can launch products across the partner countries with minimum regulatory fuss.
“Japan, Thailand and Australia launched the passport in February,” the FMA says in a release. “Korea continues to make progress with legal and regulatory requirements.”
But the FMA has a busy year planned beyond investment management with three other sectors to knock into shape, namely;
- capital markets;
- sales, advice and distribution; and,
- banking and insurance.
The government is currently drafting proposals that should grant more powers to the FMA to police the banking and insurance industries following the recent ‘conduct and culture’ regulatory investigations.
According to its Corporate Plan, the FMA was preparing to implement “any remit change” over banks and insurers.
Rob Everett, FMA chief, says in the report: “I acknowledge the Government’s commitment to fast-track measures to protect customers in their dealings with banks and insurers, and I expect preparation for any potential changes to our regulatory remit will be a key focus of our activity this year.
“… I also expect all market participants to review the risks we have identified for their respective sectors, and assess the relevance of these risks and how they are being mitigated. The industry should not be waiting for legislative change or the regulator to come knocking to do the right thing.”
The FMA has projected a $4.7 million budget shortfall this financial year.