The head of the Bank of England has signalled that the world’s investment management sector, which now accounts for almost 90 per cent of global gross domestic product, is to come under increased regulatory scrutiny.

The head of the Bank of England has signalled that the world’s investment management sector, which now accounts for almost 90 per cent of global gross domestic product, is to come under increased regulatory scrutiny.

In a speech at the weekend laying out what has been done so far to tighten oversight of financial services since the 2008 crisis, and what needs to be done, Mark Carney, BoE governor, cited the investment management sector as an area requiring further attention.

“The growth of the asset management sector brings welcome diversity to financial intermediation. However, there must also be a focus, as there has been with banks, on the systemic risks it could create. Although the sector is becoming more concentrated, the risks don’t simply arise from the size of asset managers,” he said.

“They arise from the particular activities some in the sector undertake. The biggest risks arise from combining high levels of leverage with holdings of illiquid assets and commitments to provide liquidity at short notice. In the current environment, those types of activities need careful monitoring, and possibly a deliberate policy response,” he said.

Earlier in October, a survey by PricewaterhouseCoopers found that the UK fund management industry had been hit by an indiscriminate collapse of trust in financial services and inspires less confidence among the public than the police or UK health service, despite both latter sectors being hit by scandals. That survey said that the sector arguably played little or no role in the crisis.

Already, the alternative fund management sector – covering the likes of hedge funds – has been brought under tighter regulatory oversight in the US and Europe, such as through the European Union’s Alternative Investment Fund Managers Directive.

Progess, more to do
Separately, Carney said that effective bank capital requirements have increased seven-fold while major banks are on track to meet such requirements five years in advance. He said that there have been changes to banks’ incentives to engage in proprietary trading, market-making lending and restrictions on the use of off-balance sheet vehicles.

Notably, however, Carney hinted that far more remained to be done in tackling the so-called “too-big-to-fail” issue – that of where banks become so large that their managers expect to be bailed out by governments fearful of the impact of a failure, thereby creating the “moral hazard” of irresponsible behaviour in the first place.