Based on a survey of four Supervisors for 53 licensed fund managers, the FMA Managed Investment Schemes Sector Risk Assessment reports that risk controls in the sector are successful in reducing overall risk to medium/low, and concludes that without them the risk would be medium to high. This makes the possibility of harm occurring “unlikely” and the consequence of the harm “minor” the report concludes.
However, within the overall rating, the effectiveness of risk controls varied for mortgage fund managers, on governance risk for smaller funds, and on operational risks for larger more complex funds. The survey found some managers' boards and governance structures provide stronger support than others at the ‘top level’ of the business to promote sound governance, compliance frameworks and control processes. Better practices were more common in large fund managers. Of the schemes analysed, 15 were small (less than $250 million funds under management), and three were property investment schemes. The survey did not include superannuation and workplace savings schemes managers and forest and property fund managers.
Overall and Emerging Risk Factors
Top risk factors to the overall sector include macroeconomic factors, product management risk (such as product disclosure documentation, marketing and advertising), new financial instruments (typically volatile and/or illiquid), investment operations (risk embedded in the managers’ business operations, systems and processes), and manager oversight of outsourced investment services.
The survey results were aggregated by fund manager, risk category (business governance, investment risk, and operational risk), sub-sector and sector.
Emerging risks were also identified around cybersecurity, business continuity planning, and the ability of some managers to meet upcoming statutory obligations on climate-related disclosure.
The FMA website has information sheets on cybersecurity and operational system resilience aimed at fund managers and financial advisers.On the topic of climate change, the FMA has published guidance notes on its advertising and disclosure expectations for financial products that incorporate non-financial factors such as environmental, social and governance performance.
FMA director of investment management Paul Gregory finds the overall results encouraging. He says the report highlights the importance of supervisors’ continued efforts to monitor the sector and ensure mitigants and controls are adequate and effective.
