MIS Sector Risk Assessment by the FMA: What Fund Managers need to know

On 19 January 2023, the Financial Markets Authority (FMA) published its first Managed Investment Schemes (MIS) Sector Risk Assessment (SRA). The SRA establishes a broad perspective on the risks in the MIS sector. Sean Condon breaks down their key findings.   

FMA MIS Sector Risk Assessment Background

The FMA wanted clarity on current risks in the Funds Management sector, so the organisations (and Supervisors) can target their work on specific issues and managers.  

The results stem from survey responses provided by 53 Fund Managers to their Supervisors who then had to: 

  • Rate the risk level of each fund manager they supervise, across 22 different risk factors; 
  • Assess the effectiveness of the mitigants the fund managers use to manage risk; and 
  • Provide comments on the reasons for those ratings.

Results were then aggregated and assessed by the FMA.  

FMA MIS Sector Risk Assessment Findings

The report highlights that effective risk management by Fund Managers is an important mitigant against the potential for harm to the best interests of investors in managed funds, including KiwiSaver. It concludes that the controls currently used by managers reduce the overall risk of the sector to medium/low and that without controls, the risk would be medium/high.  

This report also stresses that the effectiveness of controls varies and there are pockets of relatively higher risk within the sector (in all cases, these are heightened by current macroeconomic conditions). Finally, the report provides statistical information as to the effect of mitigation efforts by fund managers on risks and additional information on how these risks affect individual sub-sectors.

According to the SRA, the key risks [1] faced by fund managers are:  

  • Macro impacts on investments (external factors such as interest rates, economic cycles and global market conditions), 
  • Product offering risk (offer documents, product disclosures, reporting, advertising), 
  • Investment operations and outsourcing oversight risk (includes fund administration functions and oversight of outsourced activity), 
  • Manager decision-making risk (investment team key person risk, investment governance and quality of the investment decision making process) 
  • Manager financial strength (revenues, cost structures, cashflows, debt),
  • Board oversight risk (competence and composition of the board), 
  • The risk of new (and typically volatile and/or illiquid) financial instruments (“trend chasing” – such as crypto).    

The SRA also notes emerging risks in cyber security, business continuity planning, and whether some managers can meet their future climate-related disclosure obligations.

Size [2] matters. The SRA recognises that some risks in the sector correlate to the size of the funds. For large-sized fund managers, top risks are (i) complexity of investment operations, (ii) outsourcing risks, and (iii) product offering (which comes with greater advertising and promotional activity).  

Medium-sized fund managers’ risks arise from their systems, processes, and capabilities not keeping pace with the growth of their businesses (resulting in issues like operational errors, high staff turnover and deficiencies in disclosure documentation). The financial strength and  governance of small-sized funds are also noted as risks. 

Next steps 

Fund managers will be expected to review the SRA, measure their own risks against those described in the SRA (including those noted as emerging risks) and where necessary, take action (for example if their mitigants or controls require strengthening).  

As for the FMA, they have explained that they intend to collaborate with Supervisors to ensure the risks identified in the sector risk assessment (SRA) are (or continue to be) managed effectively. They will also use the report to identify risk areas to guide its engagement with Supervisors, and inform the FMA’s own supervisory activity in the sector.  

[1] These are considered as primary contributors to risk in the Funds Management sector 

[2] Large fund managers – managers with FUM of more than $10 billion as of 29 October 2021; Medium fund managers – managers with FUM of between $250 million and $10 billion; Small fund managers – managers with FUM of less than $250 million; 

Managed Investment Schemes Sector Risk Assessment