The asset management industry has not received the kind of regulatory heat suffered by banks in recent years, but a global group is now putting this sector under the spotlight.

Global regulators have had a good crack at the banking sector in recent years, and now it is the turn of the asset management industry, reportedly holding a total of $76 trillion in assets.

The Switzerland-headquartered Financial Stability Board, set up last year to drive internationally co-ordinated efforts to reduce financial risks, has set out a public consultation on how to reduce “structural vulnerabilities” in the asset management industry.

“The growth in market-based finance has diversified the sources of credit and investment. Given its increased importance, a resilient asset management sector is vital to finance strong, sustainable and balanced growth. These policy recommendations are designed to ensure that across the FSB membership asset managers can continue to fulfil these roles to the benefit of all,” said Mark Carney, chair of the FSB and governor of the Bank of England.

Asset managers, while they do not take deposits for lending purposes such as banks, can give rise to concerns about whether their underlying investments are out of line with the liquidity requirements of clients. For example, if a fund holds real estate, a typically illiquid asset class, this can pose problems if investors expect same-day access to their money. Issues can also arise when funds employ leverage to boost returns, as with closed-end listed investment trusts. In the early noughties, for example, a number of UK “split-cap” investment trusts suffered massive falls in value caused by cross-holdings and high gearing. Funds that lend out shares to stock lenders can also encounter problems if stock is not returned in stressed market conditions.

Regulators in a number of jurisdictions have already imposed new rules on alternative investment sectors such as hedge funds. In the European Union, for example, the Alternative Investment Fund Managers Directive imposes fresh disclosure and depository requirements on firms. Critics have argued that the AIFMD was a hammer to crack a relatively insignificant nut, given that the sector was not a major cause of the financial crisis in the first place.

The FSB’s work to understand and address potential financial stability risks from structural vulnerabilities associated with asset management was launched in March.

It focuses its attention on the problem of “liquidity mismatch” on open-ended funds (public and private, including exchange-traded funds but excluding money market funds). It will concentrate ideas on leverage on all types of funds, whether they use borrowing or derivatives.

Recommendations for operational risk focus on asset managers that are large, complex, and/or provide critical services; those for securities lending activities focus on asset managers’ agent lender activities (i.e. lending of securities of which an entity is not the beneficial owner), in particular their provision of indemnities to clients, the FSB said in a statement yesterday.

The FSB intends to finalise the policy recommendations by the end of 2016.