HONG KONG: International watchdogs have yet to make the case for labelling large asset managers systemically risky, a leading regulator has said, in comments that are set to further fuel a raging debate over whether such firms can be too big to fail.

The Financial Stability Board has proposed adding big asset management firms such as Fidelity, BlackRock and Pimco, to a global list of non-bank institutions whose failure could threaten the global financial system, potentially resulting in costly capital buffers and other requirements.

The international watchdog has said the enormous value of assets held by these institutions, adding up to several trillions of dollars, makes them systemically important.

But Greg Medcraft, chairman of the Australian Securities and Investments Commission and board chair of the International Organization of Securities Commissions (IOSCO), told the Reuters Financial Regulation Summit that he was not yet convinced.

“There has been a lot of discussion about the systemic risk of fund managers. My personal view is that while fund management has grown significantly, I think the jury is still out in terms of whether it is a systemic risk or not. I think an area we’ve certainly got to work on is identifying where fund managers could cause systemic risk, but I don’t think at this stage the case has been proven,” he said.

His comments reflect growing behind-the-scenes tensions between central banks, which dominate the FSB and have pushed for tougher rules for all part of the financial system, and markets regulators, who have called for a more nuanced regime for asset managers.

Following the 2008 collapse of Lehman Brothers, international regulators aimed to reinforce the financial system by identifying and imposing special conditions on global financial institutions considered too big to fail.

In January 2014 the FSB along with IOSCO published a consultation designed to expand this list beyond the banking and insurance sectors, to potentially include asset managers and other financial firms.

The proposal sparked a fierce backlash from the asset management community, who said the methodology was flawed because it focused on the size of an institution, rather than the types of functions it performs — criticisms privately shared by markets regulators.

In response to the industry outcry, the FSB and IOSCO published a revised consultation in March 2015 refining its assessment methodology, but asset managers are still fighting the proposal which could see them subjected to expensive capital requirements and structural changes which they say would distort the competitive landscape and hurt end-investors.

ICI Global, the international asset management trade group, has said that asset managers should not be designated as systemically important because they do not perform risky bank-like functions such as lending.

Speaking to Reuters on Tuesday, Medcraft echoed this view saying funds are “very different to banks,” adding: “There is an issue globally about liquidity risk which is driving a lot of discussion about fund management, but at the end of the day if there is a run on a fund, most funds have the ability to suspend redemptions and have an orderly pay down”.

The consultation closes on May 29. In a statement, the FSB said it, along with IOSCO, “will review the comments received thereafter to revise the proposed methodologies as necessary”.