* Funds complain they are unfairly viewed through banking
* Funds warn that capital requirements would hit hard
* Central bankers muscle in on securities regulator
By Huw Jones
LONDON, April 4 Top mutual funds face extra
scrutiny in the United States and Britain, regardless of whether
global regulators push ahead with new rules based on a
consultation that closed on Monday.
The consultation by the Financial Stability Board (FSB), the
regulatory arm of the world's leading economies (G20), raised
hackles by proposing that funds with more than $100 billion in
assets are systemically important. That would mean they face
extra supervisory requirements that have yet to be spelt out.
Mutual funds invest in shares and bonds, typically to
generate income for investors in old age. They argue that
tougher regulation will raise costs that will be passed on to
investors in higher fees. They also say they don't take risks
like banks, so using size as a criterion is misleading.
"Size does not equate to risk," Barbara Novick, vice
chairman of BlackRock, the world's biggest asset manager, told
Reuters. "If they are going to look for risk, they should look
for it in the right place."
The $87 trillion mutual funds industry insists it poses no
threat to financial stability and played no part in the 2007-09
financial crisis. That crisis saw taxpayers bailing out banks
and the G20 pledging to leave no part of the financial system
Consequently, securities regulators such as the FSB are
showing more interest in the big funds. And no matter what the
regulators decide, central banks like the U.S. Federal Reserve
and the Bank of England are paying more attention as well.
Based on a $100 billion threshold, about 12 to 14 funds
would be affected, all based in the United States. Among them
are Vanguard, PIMCO, American Funds, SPDR S&P, Fidelity and
JPMorgan, though not BlackRock, as none of its individual funds
reaches the proposed threshold. Britain and the rest of Europe
would not figure at all.
"There is a sense in Europe that the FSB plans are less
likely to bite," said Richard Metcalfe, a director of regulatory
affairs at Britain's Investment Management Association. "We
believe that no collective funds in the UK would trigger
whatever measures it is that the FSB ... might have in mind."
The FSB has not set a deadline for deciding on criteria for
selecting funds, or for fleshing out the extra requirements. A
similar exercise for top banks means they will have to hold
extra capital from 2016. Capital rules for top insurers are due
to be finished by year end.
The aim is to end so-called "too big to fail" institutions,
meaning a fund, bank or insurer so large taxpayers would always
save it from collapse, to avoid the turmoil in global markets
that occurred when Lehman Brothers bank went under in 2008.
The FSB is expected to update G20 leaders on progress at
their summit in Brisbane, Australia, in November. Given the
sector's hostility, it could decide to consult further before
turning to what extra measures would be imposed on top funds.
One concern for regulators is the potential risk from funds
that offer customers an indemnification or guarantee that they
and not the investor would bear losses. A basic capital
framework is one potential solution for such funds, a person
familiar with the FSB project said.
Submissions from the fund industry's trade bodies to the FSB
on Monday were adamant that funds bear no resemblance to
leveraged banks. But funds in Britain and the United States are
likely to feel the heat no matter what the FSB comes up with,
industry officials on both sides of the Atlantic say.
The Investment Company Institute, or ICI, a U.S. body that
lobbies on behalf of funds and their shareholders, said many
regulators see the world through a banking lens.
The FSB is chaired by Bank of England Governor Mark Carney,
and central banks are seen to be muscling in on what had been
securities supervisors' territory, which looked at products and
fees rather than systemic risks. Central bankers usually favour
capital requirements for increasing safety at financial firms.
"This would immediately penalise shareholders and probably
make the funds uncompetitive and unsustainable," ICI chief
executive Paul Schott Stevens told Reuters.
IMA's Metcalfe said it was unclear who would hold the
capital, the fund or its manager, and what impact that would
have on investment.
Industry insiders say top funds hope that by influencing the
FSB they can in turn push back against national central banks
like the Federal Reserve and Bank of England, which are also
starting to look at mutual funds.
Any recommendations from the FSB will be for regulators like
the Fed and BoE to apply nationally.
The Fed is keen to monitor mutual funds, industry officials
say. The U.S. Financial Stability Oversight Council (FSOC),
which includes the Fed, will host a conference next month on
asset management activities.
In Britain, the Bank of England's head of financial
stability, Andy Haldane, said in a speech on Friday that major
funds can be too big to fail in some circumstances as the sector
is set to grow hugely, fed by a rising population of older and
"The speech raises various issues that, whatever their
merit, are simply not recognizable in the case of U.S. mutual
funds," Schott Stevens said.
It was the first time the UK central bank had spoken about
mutual funds that way, and Haldane said the sector was the "next
frontier" for the BoE's Financial Policy Committee, Britain's
equivalent to the FSOC.
Haldane estimates that global funds assets could quadruple
to $400 trillion by 2050 with big funds already comparable in
size to top banks.
(Reporting by Huw Jones; Editing by Larry King)