No to harmonisation
Attempts to harmonise regulatory rules for asset managers in Europe are inappropriate as long as pronounced institutional differences remain, says a report commissioned by the European Asset Management Association (EAMA).
The research project, entitled: ‘Risk and regulation in European Asset Management: Is there a role for capital requirements?’by professors Julian Franks and Colin Mayer, and Oxford Economic Research Associates (OXERA) - an independent UK-based consultancy, aims to identify operational risks inherent in the asset management business and evaluate the role of capital in their mitigation.
Pointing out the incongruent nature of asset management in Europe; whereby in France collective investment schemes still dominate, while in Germany insurance companies still rule the roost and in Italy and Spain collective schemes and bank subsidiary asset managers are the largest investor group, the report says that as such marked differences persist then so should different forms of regulation.
The report also argues that high capital requirements placed on investment management groups to ensure high levels of investor protection may inadvertently be stifling competition, product variety and entry into markets.
And failures occurring in asset management - such as fraud, it says, should also not be corrected through capital requirements.
The report notes that this would be counter-productive because asset management failures tend to arise from information asymmetries or fraud, not systemic risk as in the general banking world.
Instead, correction should be made by a combination of disclosure, auditing, enforcement, insurance, custody and trustee action, the report opines.
Failure to address this issue of capital requirements could be crucial to the development of an integrated financial market in Europe, notes the research, prompting the relevant bodies to take: “careful consideration of the way in which information, insurance and legal structure can be strengthened.”
It may also blunt the competitive edge of Europe’s investment management groups on the global scene: “High capital requirements may place the European asset management industry at a competitive disadvantage in relation to other countries, most notably the USA.”
The study suggests a trade-off between investor protection and competition; while the development of insurance markets, investor protection in custody arrangements, auditing, and court enforcement will also be key components of a move towards a more market-oriented system.