NZ licensed fund managers will have to show how they plan to handle a liquidity squeeze under a proposed ‘stress test’ outlined by the Financial Markets Authority (FMA) last month.
“The review is likely to focus on how [managed investment scheme] MIS managers would respond to such an event, their decision-making processes, the tools they have available for dealing with the event, how they ensure they protect the needs of both ongoing and withdrawing investors, and how they communicate to investors,” the FMA told Investment News NZ. “It is intended to help ensure the market is prepared for adverse liquidity conditions.”
Liquidity risks have been highlighted recently offshore with the shuttering of a popular UK Woodford Income Fund, which last week extended its temporary suspension of withdrawals until December this year.
While the FMA, headed by Rob Everett, says its liquidity risk assessment of NZ licensed managers is in “the planning stage”, a raft of other scheduled reviews in more sketchy form.
For example, the regulator says it is still “scoping out” a broader review of the MIS sector, which is on the agenda for this financial year.
The proposed review “will refine the FMA’s risk-view of the MIS sector, and ensure that both the FMA, and licensed supervisors, continue to refine our risk-based approach to monitoring of this sector”.
NZ fund fees will also face closer scrutiny by the FMA this year but the investigation won’t stretch to the sweeping reforms recommended in the UK by the Financial Conduct Authority (FCA) last year.
“… we don’t have the same formal market study powers of the FCA, so it’s unlikely we would conduct a similar econometric research,” the FMA says. “But we are considering where best to focus our work on disclosure and transparency in the year ahead.”
However, a long-planned regulatory trawl through the $30 billion plus discretionary investment management service (DIMS) world remains conceptual for now.
“We are yet to scope this [DIMS] work but we are considering a sector-risk assessment, similar to the work we are doing in the supervisor sector,” the FMA says.
The regulator has been reviewing the licensed supervisor sector – a rather small universe of six firms – after the 2016 International Monetary Fund (IMF) NZ review slated the “issue of consistency” as a concern.
As well as engaging “directly with supervisors over particular matters”, the FMA has hosted regular forums with the industry to monitor progress.
“We are also planning to conduct monitoring visits in the coming financial year,” the regulator says. “Additionally, we are working on a project, in consultation with the supervisors, to standardise and upgrade the regulatory reporting they are required to submit to us on a semi-annual basis.”
Fintech, likewise, is an emerging area of regulatory oversight with the FMA identifying a number of risks involved in robo-advice and other online platforms, including:
- issues in terms of control and management of risks associated with algorithms and the potential for errors that impact large numbers of investors;
- a reduction of the benefits associated with human interaction, including the opportunity for customers to have the risks and benefits of products and services explained;
- increased exposure of investors to frauds and scams; and,
- increased access and therefore exposure to complex products, and risky product elements such as leverage. This may be exacerbated by limits of investor capability and understanding.
“We continue to watch risky and more complex products, and we have been promoting cautionary messages to investors and consumers on these issues. (ie our calling in of binary options/ crypto),” the FMA says.
Similarly, the regulator says if the new breed of online platforms “involve the distribution of financial products, or are in the business of providing a financial service, they may be subject to the Financial Markets Conduct Act”.
But another long-running FMA project – an IMF-prompted review of NZ’s, currently unlicensed, custody sector continues to drag on with no finale in sight.
“We are currently reviewing the [custody] findings and recommendations to see what the implications are,” the regulator says. “Currently, we have no indicative time for going public with our assessment.”
