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Funds Congress 2021: Regulators outline focus on liquidity and ESG

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This year’s Funds Congress was starkly different to that at the QEII Conference Centre in Westminster last year, just weeks before Covid-19 upended traditional events and networking. But while the 10th annual Funds Congress was a smaller, online affair, without the usual cheerful networking, the panelists were once again stellar, with George Osbourne giving an insightful keynote speech to kick things off.

Not surprising given the huge uptick in investor enthusiasm for sustainable products and global government’s commitment to “Build Back Better”, ESG investing dominated many of the early panels in the morning, as did the global response to Covid-19 – and what it means for investing going forward.

But for those interested in regulatory affairs, there was also a fascinating panel discussion that featured important policymakers from the Financial Conduct Authority (FCA), Central Bank of Ireland (CBI), Commission de Surveillance du Secteur Financier (CSSF) and the  Autorité des Marchés Financiers (AMF).

Liquidity: new insights and fund types

Last year’s market turmoil, which saw some of the steepest drop in risk assets ever, provided a major stress test for European funds, just months before ESMA’s new liquidity stress test guidelines came into force in September 2020. 

Despite a few high profile blow-ups, however, regulators were mostly satisfied with how funds handled the crisis, with most able to weather the unprecedented market stress – with a major helping hand from central banks.

‘We actually saw very good behaviour within the industry,’ explained Marco Zwick, Director of the CSSF. ‘Especially when it came to using liquidity management tools. In Luxembourg we saw the use of swing pricing, a little bit of gating, but almost no suspension of funds.’

He added: ‘From a regulatory perspective, what should we take away from this? First, it should be recognised that a lot of good work had already been done before the crisis by the FSB, ESMA, IOSCO, and there has been a lot of preparation stemming from previous crises. More will be done of course, and we’ll publish those results.’

Colm Kincaid, Director of Securities and Markets Supervision at the CBI, concurred. ‘At a policy level, there’s huge work going into analysing 2020,’ he said. ‘But I find it striking how squarely some of the vulnerabilities that emerged in 2020 actually fell within some of the areas we’ve been working on for some time.’

What likely lies ahead? Both Kincaid and Zwick were quick to point out that regulators and NCAs will be wanting more granular fund data going forward, a view that’s also shared by the AMF in Paris.

‘On a policy level, we actually have three proposals,’ explained Natasha Cazenave, Managing Director of the AMF.

‘We think that all jurisdictions should have the full range of liquidity management tools at their disposal,’ she added. ‘Second, we want to more closely align AIFMD and UCITS in this area, as AIFMD is far more detailed anr robust. And lastly, we want to encourage ESMA to encourage more widespread data sharing. While we do have detailed information about suspensions, such as UK property funds, we don’t have detail about other types of liquidity tools being used.’

For the UK, meanwhile, the FCA’s Director of Markets and Wholesale Policy, Edwin Schooling Latter, took the opportunity to once again raise the FCA’s interest in new fund types.

‘We’ve recently had open consultations on whether illiquid funds should have redemption notice periods and stricter retail warnings, he said.

‘This would be a significant change,’ he conceded, ‘so obviously we would want to give a lot of notice to market participants if we do decide to go down that route. But we think that we think it could be an important tool that would help ensure that withdrawals won’t affect the price of the underlying assets, and help investors better understand the l[iquidity profile of the funds they’re investing in.’

ESG: zero tolerance for greenwashing

With $1.7 trillion now in ESG funds, a 50% increase on 2019 alone, it’s no surprise that regulators are working swifty to get to grips with the burgeoning sector, and are calling for a common reporting framework to be established as soon as possible.

‘This is very high on our agenda,’ said the AMF’s Cazenave. ‘Of course it’s driven by the huge demand from investors and the industry. But with the huge number of asset managers having recently entered this space, we are want to make sure that they aren’t simply greening their product range. 

‘The disconnect between the marketing materials and the actual funds holdings can be quite drastic,’ she added. ‘So we decided that greenwashing would be our top priority. We want transparency and we want any commitments to be meaningful and measurable. Green really does have to mean green.’

Comparable data across funds and companies is key here, and Cazenave said she had high hopes that the EU’s new sustainable finance strategy should help achieve this.

‘To ensure that this transition is successful, it’s really imperative that green finance is not harmed from the outset,’ added Kincaid. ‘That requires that regulators are especially vigilant. We need to make sure firms are accurate in what they’re describing to investors. Where the data is unclear or contingent on future developments, this should be made clear to investors.’

And while a legislative consensus is still some time away, the panel recognised that there’s a need for a single, overarching framework – something that IOSCO called for earlier this week.

In the meantime, Kincaird said, ‘firms should be erring on the side of prudence. Taking time to adopt an approach that protects the integrity of the investor and the process is really important. If that happens, then I’m confident the sector will be a success.’

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