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IPE special report May 2018

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EAMA warns against raising capital requirements

Moves to raise the capital requirements imposed on asset managers in Europe would be counterproductive, according to a report issued by the European Asset Management Association(EAMA) in London.

Such moves would discourage “the necessary development of markets in information and insurance”, says the report, written by Professors Julian Franks and Colin Mayer and Oxford Economic Research Associates. The report adds that it also could have a direct impact on competition and entry to the industry.

The authors see a danger that high capital requirements imposed on asset managers in Europe could place them at a disadvantage to US managers. “Unless capital requirements are set at unrealistically high levels, they could proved a false sense of security,” they say.

The report, which was designed to identify operational risks in asset management and to evaluate the role of capital in mitigating them, found the main market failures in the business came from “imperfect information on the part of investors and risks of fraud”. It says: “Capital requirements do not provide an appropriate correction for either form of market failure”.

In a survey of 37 European asset managers, looking after some e5trillion in assets globally, of which e2.3trillion was for domestic clients, the largest operating loss reported by a firm was e7.2m for misdealing; the next largest was e3m for breach of client guidelines. These two categories were the main operational risks for investors, says the report.

“For the most part, losses incurred have involved average amounts of e1.3m,” it notes, with total losses identified for the sample interviewed coming to e40m. Around half of the firms had indemnity insurance and nearly 40% had employee fidelity and fraud cover.

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