Boutique fund managers dodge a bullet

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Proposed financial rules for fund manager licensing could make life tougher for boutiques and start-ups, but they look to have been spared more draconian requirements.

Wednesday, November 20th 2013, 6:11AM 2 Comments

by Niko Kloeten

The Financial Markets Authority is consulting on the licensing regime for Managed Investment Schemes (MIS), introduced under the Financial Markets Conduct Act. The FMA has proposed that in order to be licensed, MIS providers will need to prove themselves in five key areas, including showing directors and key staff are fit and properand have the capability to manage the business.

Fund managers will also have to pass muster in terms of operational infrastructure, financial resources and governance.

And it’s the financial aspect of the licensing that is tipped to generate the most debate in the industry.

Unlike some overseas jurisdictions, the FMA is not proposing to require specific amounts of capital to be set aside by fund managers. However, fund managers will need to have positive net tangible assets and must be able to pay their debts as they become due in the normal course of business.

Managers will also have to maintain an “appropriate” level of liquid assets for their business, which the FMA has defined as“three months of actual or projected outgoings, on a rolling basis, with allowance for contingencies”.

Financial law specialist Jeremy Muir of Minter Ellison Rudd Watts says the proposed financial rules have some smaller fund managers worried.

“We’ve had some feedback that the proposed financial requirements are a concern for smaller fund managers – although many will be grateful that there has been no move to impose more significant capital adequacy requirements.

“Maintaining liquid assets at all times to cover three months of actual or projected outgoings will be more challenging for start-up and boutique managers than for established and large firms.” Muir says the policy aim of protecting investors from fund manager collapses, which is not historically a significant issue in New Zealand, has to be balanced against the other aims of the new legislation.

“These include promoting innovation and flexibility in financial markets by encouraging new players to enter.” His views are echoed by Pathfinder Asset Management executive director John Berry, who says the FMA appears to be on the right track with its proposed licensing criteria.

“I would say the FMA has the right priority, which is making sure the fund managers who are going to be licensed have the right systems and infrastructure and people in place.” “The next tier is the resources of fund managers and you have to strike a balance between making sure they can continue to operate as a business against not imposing strict barriers. “My view is they should not make it too hard for new people to come into the market. I know how hard it was for us and for others to set up.”

Berry welcomes the focus on the people behind the business, particularly the managers and directors. “Just putting money into a bank account doesn’t mean they’ve got the skill and know how to use those systems,” he says. 

"If they had a minimum regulatory requirement of $1 million to set up a finance business it wouldn’t have helped Bridgecorp investors or those who invested with David Ross.”

Muir says there are still questions to be answered about the licensing process. “The consultation is fairly light on detail, so it will be interesting to see how this translates into the licensing process and what level of detail and documentation the FMA will require to show that these standards are met.” Submissions on MIS licensing close on December 12.

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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