FEFSI, the European equivalent of the IMA, says new research shows there is little evidence to suppo...
FEFSI, the European equivalent of the IMA, says new research shows there is little evidence to support capital requirements as the best solution to managing operational risk of asset management companies.
Instead, better internal risk management and different insurance policies can achieve better outcomes in terms of operational risks, and at a cheaper cost to companies in relation to their overheads.
FEFSI commissioned the research because of ongoing legislative proposals for a new capital adequacy regime in the European Union.
"Capital regulation should reduce capital requirements for those institutions contracting operational risk insurance. To meet the demands of the investment fund industry, there is a need however to develop a more effective operational risk insurance market in Europe, in particular to cover low frequency, high impact risks."
FEFSI's conclusions are important because it says they will form the basis for lobbying the ongoing Basel Commission on Banking Supervision and the European Commission - and that in turn will affect fund managers operating in the UK market.
"FEFSI's position is that more attention needs to be given to proper risk management and insurance requirements to mitigate operational risk, and less to capital requirements because of their limited effectiveness as operational risk mitigator and potential anti-competitive effect," it says today.
FEFSI points out that by 2004, the UCITS Directive will require that the capital of fund management companies cannot be lower than 125,000 euros and/or 25% of fixed overheads.
Furthermore, if assets under management are above 250 million euros, the company must hold additional capital equal to two basis points of the level of assets under management in excess of 250 million euros, with a maximum of ten million euros.
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