‘Too-big-to-fail asset’ managers slam plans for tougher regulation

Global regulators face a backlash from some of the world’s largest asset managers over plans that could single them out for tougher regulation.

Draft proposals for identifying financial institutions other than banks and insurers that are considered too-big-to-fail are based on an incorrect analysis of the investment-fund industry, companies including Pacific Investment Management, Fidelity Investments, and BlackRock, said in written responses to a consultation by international standard setters.

The blueprint “is fundamentally flawed and should be withdrawn,” Pimco said in its consultation response, published on the International Organisation of Securities Commissions website.

The plan “does not accurately reflect the risks associated with investment funds or the asset management industry as a whole.”

The too-big-to-fail proposals follow moves by global regulators in the Financial Stability Board to rank banks and insurers by their potential to cause a global meltdown and demand bigger financial cushions to avert a repeat of the turmoil that followed the collapse of Lehman Brothers.

Industrial & Commercial Bank of China, was added to an FSB list of too-big-to-fail banks in November. Insurers such as AIG and Allianz were deemed systemically important in July.

Global regulators have yet to say what kind of extra rules systemic funds could face. In the case of banks and insurers, firms identified as too-big-to-fail face tougher capital requirements so that they can absorb losses, and more scrutiny by regulators to ensure that they can be safely wound down if they fail.

Bank of England governor Mark Carney, the FSB’s chair, has said that the push to target other kinds of financial firms is “integral to solving the problem” of institutions whose collapse could threaten the financial system.

Under the plans published in January by the FSB and Iosco, investment funds with over $100bn (€72bn) in assets could be labelled too-big-to-fail.

The proposals also indicate a possible alternative approach where the asset managers in charge of large funds would be the focus for extra rules.

“The size of a fund is not indicative of systemic risk, and most of the largest funds today are unlikely to pose systemic risk issues,” BlackRock said.

Focusing on the asset managers themselves would also be “the wrong approach,” it said. They “are dramatically less susceptible to financial distress than banks, broker-dealers or insurers.”

International standard-setters should scrap plans to focus on labelling specific funds, or possibly asset managers, as too-big-to-fail, and to focus instead on identifying activities that could be systemically important, the companies said.

Other types of firms covered by the draft rules include securities broker-dealers as well as finance companies that provide services such as business funding, personal loans, store credit and car loans.