German regulator calls for regular stress tests for investment companies

GERMANY - German regulator BaFin has unveiled new guidelines for German investment companies (KAGs) that will force them to conduct regular stress tests.

The new rules governing risk management for investment companies (InvMaRisk) were drawn up after changes to German investment law in 2007 meant the banking code MaRisk no longer applied to KAGs.

Arno Kempf, a partner specialising in financial services at PricewaterhouseCoopers, said implementing a strict risk management system was in everyone's interest, as it affected a KAG's bottom line.

"For example," he said, "the company itself is exposed (indirectly) to any financial risk involved in fiduciary management, as it affects all administration fees and, finally, the company's balance sheet."

He says companies would be wise to take the mantra "client risk is our risk" to heart.

Kempf said the quality of risk management systems had "visibly increased" over the last few years, prior to InvMaRisk.

"This specifically applies to the area of financial risk, but is also true of operational risk," he said, adding that many more companies now understood why a risk management system should be in place.
 
He said a holistic approach to risk management was at the heart of InvMaRisk - where the interdependence between own and fiduciary risk has to be taken into account - was "at the heart" of InvMaRisk.

"This approach signifies the unique task facing any investment company's risk management system," he added.