Financial Times: Asset managers told to hold more capital

16 September 2016

Regulators around the world have turned their attention to the spare cash asset managers held on their balance sheets, strengthening capital requirement rules in an attempt to reduce risks.

This week Aberdeen Asset Management, Europe’s third-largest listed fund house, said the UK’s financial watchdog had asked it to increase the level of cash it holds for regulatory purposes from £335m to £475m. The Financial Conduct Authority told Aberdeen to include an allowance to cover any “unsighted and unquantifiable risks”.

Investment experts believe regulators are paying more attention to asset managers’ balance sheets in an attempt to reduce systemic risks by ensuring fund houses have enough capital to weather times of market or operational stress.

Marina Cremonese, an analyst at Moody’s, the rating agency, believes policymakers are keen to make sure their oversight of the asset management sector is as robust as it is over other parts of financial services.

“The [fund] industry’s requirement in terms of capital has been low, especially compared with banking and insurance. Although regulation in the fund industry has been going up, it is still very light compared with groups [elsewhere] in the financial world.”

Phil Dobbin, an analyst at Jefferies, the investment bank, adds: “The attention [from regulators over capital requirements] first was on banks, then insurers, and now it is the turn of asset managers.”

But the increased scrutiny has also prompted fears that asset managers will have to set aside a larger proportion of their income as a regulatory buffer, at a time when their profit margins are already under pressure from investors demanding cheaper fees for investment products.

Listed asset managers often build up cash piles on their balance sheets, using this excess capital to make acquisitions, buy back shares, issue special dividends or seed new funds. But if more of this cash is set aside for regulatory capital, it is likely to have an effect on the way fund houses operate, and ultimately on their investors and shareholders.

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