Business & Investing: The FMA warns fund managers to keep reviewing their fees annually, Plus China’s growth surging on global economic rebound from Covid-19

The Financial Markets Authority has released a new set of guidelines for fund managers highlighting its expectation they will review their fees and value for money annually with their supervisors and prove to the authority this review has happened.

Each review will formally conclude the fund manager’s fees are not unreasonable and represent value for money for their investors or, if not, will prompt concrete remedial steps including increasing services, reducing fees or both.

In a wide ranging report, the FMA said managers of KiwiSaver schemes and other funds had existing obligations, statutory duties, and conduct expectations about their fees and value for money. The guidance is intended to help fund managers demonstrate how they are meeting these obligations and expectations.

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Paul Gregory, FMA Director of Investment Management said the guidance did not tell managers what to charge and accepted managers could profit from competently managing investors’ money.

“But the guidance also recognises investors are paying the cost and taking the risk and, if high fees mean investors are not getting an appropriate share of that profit, the manager’s competence is far less relevant, and the investor should walk away.”

Gregory said the guidance is based on four key principles. First, risk and return are critical, the financial value of investment management must be shared, advice and service is received, not just offered and when evaluating their fees and value for money to members, managers should use the same rigour they would apply to assessing the same of any underlying manager.

“There’s nothing in the guidance we’d not expect the boards and senior management of managed funds to be doing anyway. They are certainly asking these exact questions of their underlying managers,” Gregory said.

The draft guidance was subject to consultation and received 27 submissions, mostly from the industry. It sets out the range of tools the FMA can use if it determines a scheme’s fee is unreasonable.

Reserve Bank establishes new enforcement department

The Reserve Bank has established a new, stand-alone enforcement department designed to promote confidence in compliance across regulated sectors.

The decision follows a similar move by the NZX recently to separate its previous role as both market operator and enforcer.

The central bank, which is also the prudential regulator of banks, non-bank financial institutions and insurance companies, said the new department is operationally separate from the bank’s supervision team, but both arms will work closely together.

The new department will develop an enforcement committee to oversee enforcement actions for serious or repeated breaches of regulatory requirements, saying its enforcement framework will be both transparent and public.

Ben Carruthers, who joined the bank in 2020 as a senior adviser after 12 years at the Australian Prudential Regulation Authority (APRA), will lead the new department.

It will work closely with other regulators such as the Financial Markets Authority and the Commerce Commission.

Business confidence lifts slightly in March quarter but technical recession increasingly likely

Business confidence lifted modestly in the March quarter, according to the latest NZIER quarterly survey. However, Kiwibank economist Jarrod Kerr said the improvement was unlikely to be sufficient to avoid the economy slipping into a technical recession.

A net 11 percent of businesses noted a deterioration in general business conditions (down from a net 16 percent previously). Domestic trading activity, both experienced and expected, held steady at the start of the year, while a net 8 percent of respondents expect trading activity to improve in the next quarter.

As expected, Kerr said, a clear theme of the survey was current cost increases, supply-chain issues and an erosion of profitability faced by firms. He said something had to give.

“An acceleration in inflation lies ahead. But we think a rise in inflation will prove temporary as supply-chain issues are addressed. Headline inflation may rise, but core inflation will remain subdued [due to] the tectonic forces pushing prices down, including demographics and technology.”

Kerr said looking through the near-term softness of the data, the NZ economy looked to be on a recovery trajectory from here, saying businesses continued to hire and invest, and despite the supply constraints, the pipeline of building work in the construction sector was plentiful.

The survey found a net 15 percent of business were looking to invest in plant and machinery, the highest reading in three years. Similarly, employment intentions also improved to the highest level in almost four years.

China’s economic recovery strengthens

China’s trade jumped in March, a sign the global recovery from the Covid-19 pandemic is picking up speed.

Exports climbed 31 percent in dollar terms in March from a year earlier, customs data showed yesterday, while imports jumped 38 percent, beating expectations and leaving a trade surplus of almost US$14 billion for the month.

China has benefited from soaring global demand for medical goods and work-from-home equipment and furniture during the pandemic. The latest data shows export momentum remained strong after record gains in February, a sign that the global rebound is helping spur demand in the world’s second-largest economy.

While the trade figures are partly distorted because of last year’s low base, when the pandemic shut down much of the economy, China’s premier Li Keqiang told experts and enterprises last weekend to look beyond the ‘base effect’ and use other data and methods to assess the economic situation.

The surge in imports reflects strong domestic activity and rising commodity prices, further signs of China’s solid recovery from last year’s pandemic. It’s expected that data due on Friday is likely to show the economy expanded at a record 18.5 percent in the first quarter from a year ago.

Analysts are watching closely to see if China can sustain its export growth as demand for pandemic-related goods eases and production elsewhere picks up.

Bitcoin sets another record high, has US$70,000 in sights

Bitcoin jumped to an all-time high yesterday as investors turned bullish ahead of the impending listing of Coinbase Global on the Nasdaq exchange. It is expected to have a valuation of around $100 billion when it lists, a 1200 percent increase on its $8 billion valuation in 2017 when it began raising funding.

The cryptocurrency rose as much as 4 percent to US$62,531, exceeding the previous peak in March.

Crypto bulls are growing in number as companies embrace Bitcoin, even as sceptics doubt the durability of the boom. Goldman Sachs Group Inc. and Morgan Stanley have announced plans to offer their clients access to crypto investments. Tesla earlier this year disclosed a US$1.5 billion investment in Bitcoin and more recently started accepting it as payment for electric cars.

Sceptics point to digital coins having been inflated by stimulus spending that’s also sent stocks to record levels, while regulators around the world are stepping up oversight and casting doubt on its usefulness as a currency.

Coinbase’s public debut this week is also boosting the digital coins of other cryptocurrency exchanges, such as Binance Coin, which has jumped to become the third-most valuable cryptocurrency behind Bitcoin and Ether.

US Fed chair reveals cyberattacks have become his biggest concern

Cyberattacks are now the foremost risk to the global financial system, even more so than the lending and liquidity risks that led to the 2008 financial crisis, according to Federal Reserve Chairman Jerome Powell.

In an interview on CBS’s “60 Minutes” programme on Sunday, Powell said the world has changed substantially since the days of the Great Recession more than a decade ago.

“I would say that the risk that we keep our eyes on the most now is cyber risk,” Powell told CBS. “So you would worry about a cyber event. That’s something that many, many government agencies, including the Fed and all large private businesses and all large private financial companies in particular, monitor very carefully and invest heavily in. And that’s really where the risk I would say is now, rather than something that looked like the global financial crisis.”

One nightmare scenario, Powell said, would be if hackers managed to shut down a major payment processor — hamstringing the flow of money from one financial institution to another. That could shut down sectors or even broad swaths of the financial system, he said.

Andrew Patterson is Newsroom's Markets Editor and has worked for decades as a financial journalist, radio presenter and editor with Australia's ABC, Radio Live and NBR.

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