British funds face up to
rainy day cash pot demands
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[September 19, 2016]
By Simon Jessop
LONDON (Reuters) - Britain's fund managers
face calls to hold more emergency cash, potentially crimping their
ability to pay dividends or expand.
Banks and insurers have been set tough rules aimed at making them less
likely to go bust if markets collapse, and regulators are now looking at
the multi-trillion-pound asset management industry.
First to feel the pinch last week was Aberdeen Asset Management <ADN.L>,
which was asked to raise the minimum amount of cash it holds by 140
million pounds ($184 million), after a review by the Financial Conduct
Funds can make profits in depressed markets because they collect annual
fees on the assets they manage, but if clients quit en masse, a
manager's revenue could disappear overnight.
While most firms are cash-rich, any tightening in capital rules adds
further stress with investors uneasy over fund charges in view of low
"If you're asked to hold more capital, then that will constrain your
opportunities elsewhere, which could include returning capital to
shareholders, looking for new acquisitions, launching new products,"
said Julian Young, senior partner in the wealth and asset management
business at consultants EY.
The FCA's decision was driven by the removal of a capital credit for the
insurance Aberdeen had put in place to cover losses and by the need for
it to have more on hand for "unquantifiable" risks.
Analysts were sanguine about the impact on Aberdeen's full-year dividend
but noted that the demand has cut the amount of cash it holds on its
balance sheet above the regulatory minimum to only 78 million pounds.
"It may be that Aberdeen is the first to get this approach...and it will
be coming to the others, but if it is, having spoken to a few of them,
it's not something they have been made aware of or are necessarily
expecting," said Shore Capital analyst Paul McGinnis.
The FCA declined to comment.
Each firm currently assesses its own risks and capital requirements
under the Internal Capital Adequacy Assessment Process (ICAAP) at least
yearly and regulators can check at any time and demand a change.
"What the regulator is looking for is a much more dynamic process," EY's
"Part of it is looking at macro risks, part of it is looking at
liquidity and part of it is being very vigilant ... those risks could be
because of geography, technology or they could be due to product," Young
Investment bank Morgan Stanley said it expects investors to focus
increasingly on the amount of capital held by asset managers and it
therefore has an 'underweight' rating on Aberdeen, among others.
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A risk manager works on the trading floor at IG Index in London,
Britain August 25, 2015. REUTERS/Suzanne Plunkett
Christian Edelmann, who oversees banking and wealth and asset management
at consultants Oliver Wyman, co-authored the Morgan Stanley report. He
said for many years capital had largely unmanaged and unmonitored."
This is mainly driven by the view that, in contrast to banks, asset
managers act on a fiduciary and not on a principal risk-taking basis;
hence capital levels vary hugely across asset managers.
Markets are now wondering who may be next.
Ashmore, which like Aberdeen has taken an asset hit from emerging
markets, declined to say if it was talking to the FCA, but in its
full-year results it increased its regulatory capital by 5.5 million
pounds to 100 million pounds and had total cash of nearly 591 million
Schroders , Britain's biggest listed asset manager, said its capital
position was "very strong" - 687 million pounds in regulatory capital
against total capital of 2.9 billion pounds - and the firm was not in
special talks with its regulator, the Prudential Regulation Authority,
Henderson Group, which was not required to hold a minimum capital buffer
between 2009 and April 2016, as it digested several large takeovers,
said it was expecting the FCA to review what it should put to one side
by the end of the year.
Ahead of that, it has assessed the minimum level to be 145 million
pounds, under the ICAAP process, and has an extra 105 million pounds
above that figure.
A Jupiter <JUP.L> spokeswoman said it had an estimated requirement of 39
million pounds and an indicative surplus of 103 million pounds at the
Aside from Aberdeen's reduced dividend cover, Shore Capital's McGinnis
said the issue of regulatory capital was not a major concern as most
firms had little debt and were well-capitalized already.
(Editing by Sinead Cruise and Alexander Smith)
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