asset mgt risk outlook

8/3/2019 Asset Mgt Risk Outlook

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Financial Risk Outlook

Asset Management Sector Digest

2010

Financial Services Author ity

Delivering financial stability

Delivering market confidence

Delivering consumer protection

Delivering a reduction of financial crime


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Financial Services Authority 2010

25 The North Colonnade Canary Wharf London E14 5HS

Telephone: +44 (0)20 7066 1000 Fax: +44 (0)20 7066 1099

Website: www.fsa.gov.uk

All rights reserved


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Assetmanagementsectorleaderintroduction 3

Overviewoftheoperatingenvironmentforassetmanagementfirms 4

Buyersofassetmanagementservices 4Providersofassetmanagementservices 6Deliveryofassetmanagementservices:(i)Funds 6Deliveryofassetmanagementservices:(ii)Operations 7

Priorityrisksfortheassetmanagementsector 8

Controlsoverclientmoneyandassets 8Valuationofassetsinfunds 8AlternativeInvestmentFundManagersDirective(AIFMD) 10Platforms 12

Keymessages 13

Contents

TheFinancialServicesAuthorityinvitescommentsonthisSectorDigest.

[email protected]


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3FinancialRiskOutlook2010

Asset Management Sector Digest

Asset management

sector leaderintroduction

Dan Waters

TheAssetManagementSectorDigestispublishedalongsidetheFinancialRiskOutlook2010(FRO).TheFROsetsoutthemainrisksfacingtheUKfinancialservicesindustry

andthisDigesthighlightsspecificrisksthatimpacttheassetmanagementsector.

Demand for asset management services rose in 2009, most noticeably in the UK retail segment. Investors made

large changes to asset allocation, which tested the product portfolio strategy of many firms. In 2009, asset

managers developed more complex investment strategies and some managers offered these to retail investors

via the UCITS fund format. 2009 highlighted the crucial role systems play in the industry, with fund platforms

accounting for over 50% of retail sales in the UK.1 More generally, rising volumes and additional complexity

exposed weaknesses in key processes and controls, such as the handling of client monies, the valuation of client

assets and the management of liquidity. On the regulatory front, in April 2009 the EU published the draft

Alternative Investment Fund Managers Directive (AIFMD) which proposes fundamental changes to how the

industry operates.

In light of these developments, we would remind firms that they must design, characterise and communicate

products in a manner appropriate for the end client. We also remind firms to ensure they possess the systems,

controls and capital to manage the investment strategies offered to clients. Finally, we urge firms to fully

consider the impact of the AIFMD and to highlight any concerns about its impact on their business with

policy makers.

1 Platformscontinuetogrowandnowholdabout110billioninassetsaccordingtoarecentreportwhichalsoestimatesthatabouthalfofallnew

investmentbusinessisbeingplacedthroughplatforms.Source:Platform Survey,MoneyManagement,February2010.Thereportsurveyed15platforms.


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FinancialRiskOutlook2010

Asset Management Sector Digest4

Middle EastAsia ex. JapanEmerging MarketsJapanEuropeNorth America0

5

10

15

20

25

30

35

40

45

Source: FSA calculations

Chart 1: Assets held by buyers of asset management services by geographical region (December 2009)

US$bn

Wealthy individuals Occupational pension funds Retail investors Sovereign wealth funds Insurance funds

Overview of the operating environment for asset management firms

Buyers of asset management servicesThe market for asset management services currently operates on a global basis, with buyers able to choose

service providers from across the world. North America remains the largest market for asset management

services (see Chart 1), while the growing wealth of Asia and the Middle East is boosting demand from

wealthy individuals and sovereign wealth funds. Long-term demand for asset management services is driven

by trends in economic growth, savings rates and demographic profiles. Rising savings rates in the UK andNorth America, and continued economic growth in Asia, will increase demand for asset management in

these markets.

Although subject to ongoing debate, the draft AIFMD presently contains restrictions on the ability of

asset managers based outside the European Economic Area (EEA) to market Alternative Investment

Funds (AIFs) to EEA investors. This proposal may exclude some current product providers from the EEA,

reducing investor choice and increasing their costs. In the long term, there is a risk that other countries

may retaliate and exclude EEA-based providers of asset management services from growth markets. In the

medium to long term, unjustified barriers to the international flow of investment capital are damaging to

the development of sustainable economic growth and prosperity.

The occupational pension schemes and retail funds segments in the US and the UK are key players inthe market. In both the US and the UK, the number of defined benefit occupational pension schemes

is declining, as there is a shift towards defined contribution schemes. One major consequence of this

trend is to highlight the importance of systems platforms to support both defined contribution and retail

investment schemes. During 2009 occupational pension funds in the US and the UK continued to diversify

assets and strategies. Pension funds are replacing large holdings of domestic equities often managed

by one or two firms with overseas assets and alternative investment strategies, a move which benefits

smaller, specialist asset management companies.

Tactical switches between different asset classes also have a considerable impact on demand for the services

of individual firms.

Asset

management

is a global

business...

but the

AIFMD may

reduce investor

choice.

Retail demand isgrowing


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Q4 2009Q3 2009Q2 2009Q1 2009Q4 2008Q3 2008Q2 2008Q1 2008-8,000

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

8,000

10,000

Source: IMA, FSA calculations

Chart 2: Net sales of UK domiciled unit trusts / OEICs by type of asset invested

mn

Equity Bond Money market Balanced OtherProperty

In 2009, investors partially recovered their appetite for financial risk. In the UK, on the back of low

interest rates and changing perceptions of value, retail investors bought record amounts of investment

funds, particularly those offering strategies in bonds and alternative investments (see Chart 2). Net

retail sales reached 25.8 billion in 2009 with purchases of corporate bonds and absolute return funds

amounting to 6 billion and 2.5 billion respectively.2 We are concerned, however, that the promotion of

complex investment strategies to retail investors creates the potential for consumer detriment if the risks

are not adequately understood or are poorly communicated to investors or their advisers. We also expectasset managers to manage liquidity in these funds in a manner consistent with the expectations created

when the funds were marketed to investors, especially if cash inflows reverse in response to changing

economic conditions.

Key messages

Innovationcandevelopnewproductstomeetconsumerschangingneeds.Butinnovationpresents

significantproblemsiftheinherentrisksarenotadequatelyunderstoodbytheproductprovider,or

arenotproperlycommunicatedtoinvestorsandtheiradvisers.Firmsshouldensurethatproducts

aredesignedandcharacterisedappropriately,andtakereasonablestepstoensureinvestorsare

notofferedinappropriateproducts.Firmsmustensuretheytreatcustomersfairlyandthatproduct

communicationsareclear,fairandnotmisleading(especiallywhereintermediariesmakeextensiveuse

ofthesecommunications).

Consumersshouldbeawarethatifaninvestmentfundprovideshigherreturns/yieldsthansimilar

funds,theyshouldexaminethereasonswhy(orasktheiradviser)ashigherreturns/yieldsmay

indicategreaterlevelsofriskthantheyarewillingtoaccept.

Weexpectfirmstomanageredemptionsinamannerconsistentwiththeexpectationscreatedwhen

theymarketedthefundstoinvestors.Investorsinlessliquidinstrumentsneedtounderstandany

lock-inperiodsorlimitsonredemptionrights,aswellastheassociatedvaluatingandpricingissues

thatmayariseinrespectofsuchinvestments.Inmanagingcashinflowsandoutflows,firmsmust

treatallcustomersfairly.

2 IMAInvestmentfundstatistics2009summary.

with

producers

offering

complex

products

creating risksin product design

and liquidity

management.


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Providers of asset management servicesThe majority of asset management firms saw profits increase in 2009, although the profitability of

individual businesses depended heavily on the performance of the asset classes in which they invested.

The global recovery in markets benefitted most firms, while specialist equity managers and some hedge

funds experienced a particularly sharp rebound. After strong performance from bond markets over the

last two years, specialist managers of bond funds face a more difficult outlook. The private equity sector,

which relies on bank loans to support investments in businesses and IPOs to realise value, had a more

difficult year, as bank lending and the IPO market remained muted.

Merger and Acquisition (M&A) activity within the sector increased during 2009. One noticeable trend

in the UK was the withdrawal of banks from the asset management sector. For example, Barclays sold

Barclays Global Investors (BGI) to Blackrock, and both Royal Bank of Scotland (RBS) and Credit Suisse

sold part of their asset management businesses to Aberdeen Asset Management.

The industry continued to expand the use of derivatives in investment strategies and the complexity

of products offered to investors. The growing complexity of strategies and products based on the use

of derivatives requires firms to have more sophisticated controls over investment risk and operations.

Firms must consider whether complex strategies are appropriate for their clients. There is a risk that firms

pay insufficient attention to these questions as they seek to exploit rising demand for innovative products.

In the UK, asset managers have traditionally been able to develop investment strategies without regulatory

intervention. However in 2009, politicians expressed concern over whether unfettered investment strategies

are in the public interest, with growing concern about the amount of leverage in investment strategies.

Meanwhile, the sale of products to retail investors based on high-risk investment strategies has led to

questions over whether product design and characterisation requires further regulatory intervention.

Key messages

Assetmanagerswhowidentheirrangeofinvestmenttechniquesandinstrumentsneedtohaveadequateexpertise,operatingprocesses,andriskcontrols.

Delivery of asset management services: (i) Funds

Funds and fund structures enable asset managers to deliver their investment strategies to clients. Until

2009, authorities seemed willing to allow institutional investors to negotiate the terms and conditions

governing their funds while regulatory attention focused on the regimes governing funds sold to retail

investors. The Madoff fraud, perpetrated against institutional investors among others, along with growing

concern about the role that offshore funds play in the shadow banking system, has called this policy into

question. The provisions in the AIFMD regarding equivalence requirements on depositaries and the sub-

custodians of assets outside the EU, and particularly in emerging markets, could have material impacts

on the investment strategies offered by asset managers. It may encourage them to consider regulated fund

formats, such as UCITS.

The growing sophistication of investment strategies, combined with the move to adopt regulated fund

formats, has led to considerable growth in UCITS funds. There are now more than 200 hedge funds

complying with UCITS guidelines, with assets of more than $35 billion, according to Hedge Fund

Research.3

The European Commissions work on Packaged Retail Investment products seeks to examine the

effectiveness of regulation of retail investment products across the banking, insurance and fund sectors.

It has a particular focus on the rules around selling processes and pre-contractual consumer disclosures.

Although there are significant differences in the requirements across Europe, we see clear benefits to

consumers of a more uniform approach, and encourage continued engagement by firms on these proposals.

3 UCITS III Hedge Fund Offerings proliferate as new industry model gains traction,HedgeFundResearch,February2010.

There has been

recovery in

profits at asset

managers

and increased

M&A activity.

The wider use

of complexstrategies

and growth

of their use in

UCITS funds

...compound

risks on product

design and

characterisation.


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Key messages

Weareconcernedthatinsomecases,assetmanagersarerelyingontheclassificationofafundasa

UCITSfundtojustifyitspromotiontoretailinvestorsratherthanensuringtheinvestmentstrategyis

appropriateforthetargetcustomer,andremindfirmsoftheirobligationsunderUCITSIII.

Delivery of asset management services: (ii) Operations

Complex operating systems provide the backbone of the asset management industry and it is encouraging

to see the UK industrys systems appeared to operate well during the crisis. Ensuring systems and controls

operate effectively remains a key priority for the FSA and we have identified a number of areas where

systems may be less effective than we wish them to be.

Platforms represent a major interface between retail investors and the asset management industry, with

around 110 billion invested through platforms. The Retail Distribution Review (RDR) proposals may

have a significant effect on the sale and distribution of funds and investment products. Some platformsmay find reaching or sustaining profitability challenging, particularly as they require substantial investment

to meet rising standards of service.

We are concerned that some systems and procedures to control the holding of client money and assets fall

short of our requirements.

The systems and procedures used to value client assets perform a critical role in areas such as the

calculation of performance, the setting of prices at which investors transact, and the calculation of asset

managers fees. We are concerned that some valuations may be unreliable.

Operating

systems are

crucial.

There is increased

reliance on

platforms.

Controls over

client money and

assets

and fund

valuations are

also a concern.


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Priority risks for the asset management sectorWe have identified four key risks that the asset management sector poses to the FSAs statutory objectives.

Controls over client money and assetsWe consider the protection of client money and assets to be fundamental in sustaining consumer

confidence, and have set out detailed rules in the Client Assets Sourcebook (CASS). This means ensuring

that clients money and assets are safe, and remain safe even if a firm, such as an asset manager, becomes

insolvent. We are concerned that some firms controls over client money and assets do not always achieve

the appropriate level of protection. Failure to comply with the basic requirements of CASS may result in

clients losing money through fraud or because their assets become co-mingled with firms assets.

Systems integration projects following mergers and general system upgrades can create a higher risk of

firms breaching CASS. For investment firms, we are concerned that some firms do not have accurate

records of client cash holdings. Controls over segregated accounts appear to be insufficient in some firms,

and inappropriate claims over client money may be made. This is a particular problem in firms that engage

in contingent liability transactions (for example, contracts for difference and spread-betting).

Key messages

Theprotectionofclientassetsisvitaltosustainingconfidenceininvestmentfirms.Weareconcerned

thatsomefirmscontrolsoverclientmoneyandassetsdonotalwaysachievetheappropriatelevelof

protection.Firmsmustbeabletodemonstratethattheyunderstandandareincompliancewiththeir

obligationsregardingtheprotectionofclientmoneyandassets.

Valuation of assets in funds

Under the Collective Investment Schemes Sourcebook (COLL), asset managers are responsible for

producing fair and accurate valuations for authorised funds, a responsibility they sometimes delegate tofund administrators. For unauthorised funds, responsibility for valuations is a matter of agreement between

investors and the asset manager, with responsibility often allocated to the fund administrator.

The approach to valuing assets in a fund impacts the investment performance calculation, the setting of

prices at which investors buy and sell units in funds, and the fees of the asset management firms. We view

robust and reliable valuation of assets as an essential part of the management of clients portfolios and

collective investment schemes. Failure to value assets correctly could result in litigation or reputational

damage to firms and reduce consumer confidence in asset management products.

We continue to emphasise the need for robust controls over the valuation process, especially relating

to illiquid and complex instruments. Instances of illiquidity in the underlying market and an absence

of reliable prices have made valuing fixed income instruments and property investments more difficult.Valuation has also been difficult where there has been disparity in the valuation methodologies for

distressed assets.

The protection of

client assets is

vital

and some

firms do not

meet CASS

requirements.

Continued

concerns overvaluations


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Box1:Rangeofpricingincorporatebondsinearly2009In 2009, Investitperformed a valuation experiment on corporate bonds. They found that around half

the prices for the same bonds given by various valuation services differed by more than 7%. A small

minority differed by over 100%. Investitconcluded that had this been a fund, the difference between

the maximum and minimum unit price could have been around 10%.

1059891847770635649423528211470

0

1

2

3

4

5

6

7

8

9

Source: Investit

Chart 3: Distribution of percentage difference between maximum and minimum bid prices for a sample of bonds

% difference

frequency

Those responsible for valuing assets should have adequate expertise to take a view on the fairness and

accuracy of all valuations, including conducting sense checks and challenging any valuations that do

not seem reasonable. Robust governance should exist over the systems and controls used to produce

valuations, and there should be procedures to compensate investors if inaccurate valuations occur.

Key messages

Wecontinuetoemphasisetheneedforrobustcontrolsoverthevaluationprocess,especially

relatingtolessliquidandcomplexinstruments.Firms(andtheirthird-partyadministrators)should

haveadequateexpertisetotakeaviewonthevaluations,includingbeingabletosensecheckand

ultimatelyqueryorchallengeanyvaluationstheyreceivethatdonotseemreasonable.Theyshould

alsoensuresystemsareinplacetoprotectandcompensateinvestorsifanyinaccuratevaluation

occurs.

raises the

importance of

governance and

systems and

controls for fund

valuations.


12/16



Alternative Investment Fund Managers Directive (AIFMD)The EU regulatory landscape for the alternative investment fund management sector will be the subject of

considerable change over the next few years. The proposed AIFMD is one of a package of measures put

forward by the European Commission in response to the crisis.

As originally proposed by the European Commission, the AIFMD would significantly restrict the ability of

EU-based fund managers to invest outside the EU by way of delegating portfolio management to non-EU

fund managers. The provisions in respect of leverage limits and the liability and equivalence requirements

on depositaries and the sub-custodians outside the EU, and particularly in emerging markets, could have

a material impact on asset managers investment strategies, or encourage them to consider other fund

vehicles such as UCITS. Furthermore, in more recent EU Council drafts of the Directive, restrictions

on activities which can be performed by fund managers in addition to managing alternative investment

funds could drive changes to business and operating models and could create significant barriers to entry,

particularly for smaller firms.

The FSA already regulates the vast majority of fund managers captured by the AIFMD and sees benefits

from harmonising the regulatory framework across the EEA. We have, for instance, long thought that a

pan-European regime for private placement was desirable to replace the current regulation across the EU

which is complex and inefficient, and acts as barrier to entry in many countries. The Turner Review also

acknowledged that supervisors would benefit from a harmonised framework for the collection and sharing

of systemically important information.

Since the beginning of May 2009, the AIFMD has been subject to negotiation in the EU Council and

the EU Parliament under the Co-decision Procedure. Throughout, the FSA has argued for a number of

improvements to the original draft Directive. These have included introducing greater differentiation in the

provisions to reflect the different types of fund management caught by the proposals and better address

regulatory concerns.

The independent impact assessment conducted by Charles River Associates4 on behalf of the FSA

concluded that the draft Directive would result in higher costs to investors and more limited choice.

Should the industry view the regulatory framework imposed by the Directive as disproportionate, any

resulting migration of AIFMs outside the EU would weaken the ability of supervisors to collect and share

systemically important information. The flight of large parts of the industry outside the EU would leave

markets exposed to the risks targeted by the AIFMD but without any ability to control them.

It is therefore important that, through the Co-decision Procedure, changes are made to the initial

proposal to deliver the Commissions original investor protection and financial stability objectives in a

proportionate manner. Practitioners and investors continue to have an important role to play in engaging

with policy makers to ensure that the Directive delivers the right outcomes for investors and for the wider

financial system.

4 Impact of the proposed AIFM directive across Europe,CharlesRiverAssociates,October2009.

The AIFMD

will have a

considerable

impact

potentially

limiting investor

returns and

choice.


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Box2:ResearchontheimpactoftheproposedAIFMDacrossEuropeThe FSA commissioned a piece of independent research by Charles River Associates to assess the

possible impact of the draft AIFMD. The results of this research were published in October 2009.4

The alternative investment funds (AIF) sector (which as defined by the Directive covers most non-

UCITS funds) is heterogeneous. It invests in a broad range of financial instruments and assets,

and employs different investment strategies to provide investors with tailored risk and return

characteristics. The different business models adopted by the sector present different regulatory

challenges and, although the Directive attempts to address particular concerns arising from some

types of AIF, the adoption of a one size fits all approach by the Directive is disproportionate.

Table1:SummaryofestimatedcostsoftheAIFMDacrossEurope

Hedge fundsPrivateequity

Venturecapital

Real estateInvestment

Trusts

One-off costs Disclosuretoinvestors 0.3 0.0 0.0

Delegationrestructuring 8.25 8.25 8.25

Relocating/re-domiciling 39.9 19.7 19.7 0.9

Legalstructures 14.1 14.1 14.1 14.1 63.5

Total one-off costs (bp) 62.5 42.1 33.8 23.2 63.5

Total one-off costs (mn) 1404 756 45 451 543

Ongoing costs

Disclosuretoinvestors 0.1 0.0 0.0

Disclosurereportfoliocompanies 0.0 2.9 3.7 0.0 0.0

Delegation 0.2 0.2 0.2

Valuator 0.9 4.3 9.2

Capital 1.5 1.9

Depositary 5 10

Total one-off costs (bp) 1 14 25 0.2

Total one-off costs (mn) 27 248 33 3

Source:CharlesRiverAssociates

The research concluded that the AIFMD will have significant impacts in terms of reduced investor

choice and substantial compliance costs for the AIFM industry. Some of these costs, resulting fromboth direct costs and opportunity costs, will be passed onto investors resulting in lower net returns.

If adopted in its original form, the Directive will cause a fundamental re-organisation of the business

model of EEA based AIFMs, with significant one-off costs arising from changes of domicile and legal

structure.

Key messages

TheAIFMDislikelytohaveasignificantimpactontheglobalalternativeassetmanagementindustry

andaffiliatedserviceproviders.Continuedengagementbetweenpractitioners,investorsandpolicy

makerswillbeimportanttoensurethatregulatorychangesareappropriate,proportionateandmost

importantlydelivertherightoutcomesforinvestorsandforthewiderfinancialsystem.

4 Impact of the proposed AIFM directive across Europe,CharlesRiverAssociates,October2009.


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PlatformsIntermediaries remain the main channel for retail distribution of investment funds, delivering 85% of all

gross retail sales in 2008 according to the IMA.6 Intermediaries increasingly rely on platforms which offer

access to a wide range of funds, tax wrappers and various administrative services.

The use of platforms with different business models may create uncertainty over the relationship between

advisers, platforms and product providers. Problem areas include uncertainty over the nature of the

responsibilities owed by platforms to consumers, the inability of a number of platforms to support

re-registration of investments and the failure of many platforms to disclose all relevant charges adequately

to advisers and retail consumers.

Some platforms are not profitable on a standalone basis. There is a risk of consumer detriment in the event

of failures or poorly executed consolidation in the industry. Capital funding considerations are important

for these firms since they are system intensive and expensive to set up and maintain. The wind down of a

platform operation may be costly and time consuming, and Pillar 1 capital requirements (or equivalent)

may not be sufficient to cover these costs.

The increasing volume and concentration of customer assets and transactions on platforms makes the

integrity and effectiveness of their systems particularly important. The reconciliation of assets held under

custody is a key control to ensure that the client assets are properly accounted for, particularly within bulk

nominee or similar structures. Challenges in performing timely and accurate reconciliations would make it

impossible for firms that perform custody functions for their clients to run their business adequately.

Key messages

Platformsofferingbroadmarketaccesstoawiderrangeoffunds,taxwrappersandvarious

administrativeservicesarebecomingmorefrequentlyused,andfirmsofferingplatformsoperatea

rangeofdifferentbusinessmodelswithvaryingdegreesofmaturity.Firmsofferingplatformservices

shouldensurethatthesebusinessunitsareadequatelycapitalisedfortherisksthattheypose,includingthecostsofwindingdownoperations.Theymustensurethatclientmoneyandassetsare

protectedatallstageswhiletransactionsareprocessedthroughtheplatform.

6 Asset Management in the UK,IMAAnnualSurvey,2008.

Platforms are

used more

frequently

and should

be adequately

capitalised

while also

ensuring client

assets are

protected.


15/16



Key messages

Controls over client money and assets:Theprotectionofclientassetsisvitaltosustainingconfidenceininvestment

firms.Weareconcernedthatsomefirmscontrolsoverclientmoneyandassetsdonotalwaysachievetheappropriatelevelofprotection.Firmsmustbeabletodemonstratethattheyunderstandandareincompliancewiththeirobligations

regardingtheprotectionofclientmoneyandassets.

Valuation of assets in funds:Wecontinuetoemphasisetheneedforrobustcontrolsoverthevaluationprocess,

especiallyrelatingtolessliquidandcomplexinstruments.Firms(andtheirthird-partyadministrators)shouldhave

adequateexpertisetotakeaviewonthevaluations,includingbeingabletosensecheckandultimatelyqueryor

challengeanyvaluationstheyreceivethatdonotseemreasonable.Theyshouldalsoensuresystemsareinplaceto

protectandcompensateinvestorsifanyinaccuratevaluationoccurs.

Alternative Investment Fund Managers Directive:theAIFMDislikelytohaveasignificantimpactontheglobal

alternativeassetmanagementindustryandaffiliatedserviceproviders.Continuedengagementbetweenpractitioners,

investorsandpolicymakerswillbeimportanttoensurethatregulatorychangesareappropriate,proportionateandmostimportantlydelivertherightoutcomesforinvestorsandforthewiderfinancialsystem.

Platforms:offeringbroadmarketaccesstoawiderrangeoffunds,taxwrappersandvariousadministrativeservicesare

becomingmorefrequentlyused,andfirmsofferingplatformsoperatearangeofdifferentbusinessmodelswithvarying

degreesofmaturity.Firmsofferingplatformservicesshouldensurethatthesebusinessunitsareadequatelycapitalised

fortherisksthattheypose,includingthecostsofwindingdownoperations.Theymustensurethatclientmoneyand

assetsareprotectedatallstageswhiletransactionsareprocessedthroughtheplatform.

Investment product design and characterisation:Innovationcandevelopnewproductstomeetconsumerschanging

needs.Butinnovationpresentssignificantproblemsiftheinherentrisksarenotadequatelyunderstoodbytheproduct

providerorarenotproperlycommunicatedtoinvestorsandtheiradvisers.Firmsshouldensurethatproductsare

designedandcharacterisedappropriately,andtakereasonablestepstoensureinvestorsarenotofferedinappropriate

products.Firmsmustensuretheytreatcustomersfairlyandthatproductcommunicationsareclear,fairandnot

misleading(especiallywhereintermediariesmakeextensiveuseofthesecommunications).

Consumers:shouldbeawarethatifaninvestmentfundprovideshigherreturns/yieldsthansimilarfunds,theyshould

examinethereasonswhy(orasktheiradviser)ashigherreturns/yieldsmayindicategreaterlevelsofriskthantheyare

willingtoaccept.

Fund liquidity:Weexpectfirmstomanageredemptionsinamannerconsistentwiththeexpectationscreatedwhenthey

marketedthefundstoinvestors.Investorsinlessliquidinstrumentsneedtounderstandanylock-inperiodsorlimitson

redemptionrights,aswellastheassociatedvaluationandpricingissuesthatmayariseinrespectofsuchinvestments.

Inmanagingcashinflowsandoutflows,firmsmusttreatallcustomersfairly.

Asset managers capacity to manage complex investment strategies:Assetmanagerswhowidentheirrangeof

investmenttechniquesandinstrumentsneedtohaveadequateexpertise,operatingprocesses,andriskcontrols.

Growth in UCITS funds:Weareconcernedthatinsomecases,assetmanagersarerelyingontheclassificationofafund

asaUCITSfundtojustifyitspromotiontoretailinvestorsratherthanensuringtheinvestmentstrategyisappropriate

forthetargetconsumer,andremindfirmsoftheirobligationsunderUCITSIII.


16/16

The Financial Services Authority

25 The North Colonnade Canary Wharf London E14 5HS

Telephone: +44 (0)20 7066 1000 Fax: +44 (0)20 7066 1099

Website: www.fsa.gov.uk

Registered as a Limited Company in England and Wales No. 1920623. Registered Office as above.

PUB REF: 002128a

asset mgt risk outlook

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