20 November 2020

ESMA's Ross: Future challenges for fund managers

Two topics that I am conviced are also very important for the future of the asset management sector (and beyond): (i) delegation, in light of the looming end of the Brexit transitional period and (ii) sustainable finance.

I am very pleased to have been invited by AIMA to give a keynote speech at this event. I think this is an excellent opportunity to provide you with some thoughts on the outlook for the asset management sector from a supervisory perspective. Of course this comes at extremely challenging times for all of our lives and the challenges go well beyond the financial sector.

The events linked to the pandemic that spread across the globe since the beginning of this year are a game changer for most of us and it is crucial to reflect on the recent experience also from a more narrow regulatory perspective and specifically in the asset management sector. Steven Maijoor, the Chair of ESMA, has last week spoken about some of the lessons to be learned from the crisis. Giving attention to these topics should , however, not come at the cost of neglecting other very important developments that are occurring in the asset management sector.This is the reason why I will spend only a few words on the Covid-related events, looking at them from an ESMA perspective, and then move rapidly on to two other topics that I am conviced are also very important for the future of the asset management sector (and beyond): (i) delegation, in light of the looming end of the Brexit transitional period and (ii) sustainable finance.

Before I get to those important topics, I would like to share with you a couple of reflections on the Covid experience so far in the funds’ sector, from an ESMA perspective. First, I would like to stress the substantive coordination efforts deployed by ESMA in order to ensure exchanges among national competent authorities (NCAs) across the EU on market developments and supervisory risks. This was done with a particular focus on liquidity issues in the asset management sector. Indeed, on one side we fostered exchanges among NCAs on the use of liquidity management tools (LMTs) which helped monitoring across the EU the overall situation in the sector. On the other side, we acted upon a recent recommendation from the European Systemic Risk Board (ESRB) and coordinated a focused supervisory exercise with investment funds exposed to less liquid asset classes (corporate debt and real estate assets) to assess their preparedness to potential future adverse shocks.

This leads me to the second point that I wanted to make on this topic. At this stage, what we saw is that overall the majority of the sector managed to maintain its activities adequately, while facing unprecedented pressure - last March in particular. This view is based, for instance, on the fact that the global amount of fund suspensions at EU level was quite modest back then. However, I should stress that there are also worrying signals. Certainsegments of the EU MMF sector faced acute stress and – although the relevant funds did not suspend – they showed deficiencies that deserve further scrutiny. Morevover, the findings of the supervisory exercise that I mentioned a moment ago evidence that there are a number of shortcomings in the way liquidity is managed in certain segments of the asset management sector. This deserves further action: first and foremost by asset managers who need to promptly address any misalignement between their funds’ investment strategies and redemption policies; secondly, by NCAs who need to keep monitoring and actively supervise the funds under their jurisdiction.

I will stop here on this topic on which Steven Maijoor already extensively spoke last week and for more detail on our work related to the ESRB recommendation that I referred to earlier, I invite you to read the report that we published last week1. I will now move to the two main themes that I announced earlier.
Delegation in asset management in light of the Brexit challenges

Brexit

With just over one month to go until the end of the UK’s transition out of the EU, I believe that it is important for me to give again some visibility and attention to some of our Brexit related activities. As of 1 January 2021, UK financial firms will no longer have unfettered access to the EU’s single market. This is an inevitability and something that will not be affected by the ongoing trade deal negotiations. While this is certainly a big change, firms have now had four years since the UK referendum to prepare for this...

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