UK - The Financial Services Authority (FSA) has published two discussion papers focusing on hedge funds and retail investment products.
The papers look, respectively, at the impact of hedge funds on the UK's wholesale markets - Hedge Funds: A Discussion of Risk and Regulatory Engagement – and at the regulatory regime that applies to retail investment products - Wider Range of Retail Investment Products: Consumer Protection in a Rapidly Changing World.
Joseph Mariathasan, a consultant from Stratcom, commented: “In an enviroment where bond and equity yields mean that some investors would be better putting their money in a building society account, it is inevitable that hedge funds would be a hot topic of conversation.”
In the first paper the FSA said it views hedge funds as a growing and beneficial component of the financial system. Not withstanding that, they do pose risks to the FSA's statutory objectives which this discussion paper seeks to identify. It also sets out current and potential future mitigating actions.
Reflecting the growth in importance of hedge funds, the FSA has already increased its engagement with the industry and, in the last twelve months in particular, has increased data collection both from prime brokers and, to a lesser extent, hedge funds. It has also engaged in increased proactive market surveillance.
Going forward, the FSA is establishing a dedicated centre of hedge fund expertise and will continue to develop a more proactive supervisory relationship with high impact firms.
The paper, however, seeks views on further actions the FSA could take in a proportionate manner to increase regulatory transparency and thus improve the effectiveness of its regulatory engagement. In particular it seeks views on the costs and benefits of the FSA requiring the industry to provide it with certain additional data.
The second paper looks at the regulatory regime that applies to sophisticated investment products. In recent years there has been an increase in the quantity and range of such products that utilise techniques similar to those used by unregulated collective investment schemes (CIS) including hedge funds. This paper is intended to stimulate discussion of issues arising from this development.
It identifies three risks: first, that consumers and companies may not fully understand these products; second, that consumers may be confused by different forms and distribution channels of wider range products, resulting in mis-buying or mis-selling; and third, that consumers may be missing out on investment opportunities because of the current restrictions on the marketing of unregulated products. The FSA puts forward a number of options including asking whether a new category of sophisticated products which flag up these increased risks should be developed.
Views are also sought on whether the marketing restrictions on unregulated CIS should be lifted. The paper recognises that the investment techniques used by some offshore CIS may in fact offer lower risk investments than some of the more widely marketable vehicles. It also recognises, though, that as these products are based offshore there would be considerable challenges in ensuring adequate levels of consumer protection. The paper also discusses the consequence of adopting a no-change option.
Hector Sants, FSA Wholesale Markets and Institutions managing director, said:
We view hedge funds as a significant, useful and growing asset class through their role in providing market liquidity and diversification options for investors. However the activities of hedge funds do pose risks to the UK's financial markets and the work of the FSA, and it is right that we fully understand them.
We intend to make certain changes in how
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