FMA publishes MIS Sector Risk Assessment

  • Legal update

    20 January 2023

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Yesterday, the Financial Markets Authority (FMA) released a Managed Investment Schemes (MIS) Sector Risk Assessment (SRA) which provides insight on the current risk levels in the MIS sector.

The SRA was prepared by the FMA based on a survey of four supervisors on the 53 licensed fund managers they supervise. The scope of SRA includes all managed fund managers licensed by the FMA (except superannuation and workplace savings schemes managers; and other-MIS (forestry and property funds) managers).

Links to the report and the FMA’s media release are available here and here

Who needs to read it? Why?

Both licensed MIS managers, as well as their supervisors or trustees should, read the SRA. These parties would benefit from understanding specific areas of risk and emerging risks that, depending on the characteristics of individual funds, may warrant greater attention.

Additionally, other fund managers (e.g., wholesale) and investors with exposures in the MIS sector may consider reading the SRA to gain a more comprehensive understanding of the types of risks involved as well as how these risks affect different sub-sectors in MISs. 

What does it cover?

The SRA classifies the relevant risks into three categories – operational risk, governance risk, and investment risk:

  • Operational risk (risk embedded in business operations, processes, and systems);
  • Governance risk (risk involved in the management of funds); and
  • Investment risk (risk that may contribute to investment losses resulting from investment actions (or lack of actions)).

The FMA considers that because of risk mitigants and controls used by the licensed fund managers, the overall risk in the licensed MIS sector is lowered from medium-high to medium-low (i.e., the likelihood of harm occurring is “unlikely” and the consequence of the harm is “minor”). The FMA notes that this risk rating is based on a general overview of the sector, which does still contains areas of relatively higher risk the SRA focuses on.

The FMA identifies the primary contributors to risk in the licensed MIS sector as:

  • The impact of macro-economic factors (e.g. inflation, interest rates, exchange rates); 
  • Product management (e.g. product disclosure documentation, marketing, and advertising);
  • New financial instrument management (and trend chasing);
  • Investment operations; and
  • Manager oversight over outsourced investment services.

Other relevant risks identified within the MIS sector include:

  • Manager decision-making risk;
  • Manager financial strength risk; and
  • Board oversight risk.

The SRA highlights emerging concerns for the MIS sector, namely:

  • Cybersecurity issues;
  • The need to establish clear business continuity planning (BCP); and
  • Climate-related disclosures and integrated financial product (IFP) disclosure. 

The SRA also provides statistical information as to the effect of mitigation efforts by fund managers on risks and additional information on how these risks affect individual sub-sectors.

Our view

It is not immediately apparent what the context was for the FMA to undertake the review and publish the SRA. However, it is useful to have a public statement by the FMA as to the overall risks inherent in the licensed MIS sector.  

We note that this SRA is not the same as the sector risk assessment that is produced for the purposes of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009.

As some risks in the MIS sector correlate to the size of the funds involved, the rating can be high for some sub-categories of fund managers. For example, “investment risk for mortgage fund managers, governance risk for the managers of smaller funds, and operational risk for the managers of larger and more complex funds”.  

Fund managers will want to remain on top of insights identified from, and implications of, the FMA’s findings. In particular, the SRA will be a useful reference document for fund managers to consider risks that may have gone under the radar, consider emerging areas of risk (such as how it deals with climate-related risks), choose which areas to focus on and prioritise as a business, as well as be useful in relation to the impact it may have on funds they manage.  

What next?

If you have any questions in relation to the SRA or otherwise, please contact one of our experts. 


This article was co-authored by Shaanil Senarath-Dassanayake, a Solicitor, in our Financial Services team.