Ratings agency Moody’s says Financial Conduct Authority (FCA) proposals for the management of illiquid assets in retail investment funds would be good for asset managers despite higher operating costs.
The FCA measures, which include greater use of risk management tools in times of stress, would be “credit positive” for the industry as earnings stability should increase over time and reputational risk should be lowered.
Among other measures aimed at reducing risk for retail investors, the FCA recently said new rules could require funds to be suspended when independent valuers express uncertainty about the value of ‘immovables’, such as commercial property, that account for a significant part of a fund’s assets.
The FCA is consulting on the proposals.
Moody’s said the recommendations will increase costs for retails asset managers due to higher reporting and operational requirements, and potentially act as a small drag on fee revenue, but larger asset managers such as Standard Life Aberdeen and Legal & General Investment Management are better positioned to absorb these pressures.
However, all players, said Moody’s, should ultimately benefit from a safer investment fund industry that continues to produce strong margins with less volatility.
“Over time, the benefits of implementing these types of policy changes should increase earnings stability and lower reputational risk, a key element in assessing asset managers’ creditworthiness,” the firm said.
The FCA expects only a 0.02% increase to net asset value due to ongoing costs and Moody’s said a minimum cash buffer or caps on the proportion of investments a fund could make in illiquid assets – neither of which were proposed – would have acted as a drag on investment returns and potentially have caused funds to lose assets under management.
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