Does The Veneer Of Regulation In The Retail Fund Market Make Investors And Their Advisers Complacent?

James Newman, Co-Head, perfORM Due Diligence Services
Originally published in the April | May 2020 issue

The retail fund market has been tested like never before. The roll call of funds breaching regulatory rules, suspending operations and getting into difficulty is growing at an alarming rate. The Covid-19 pandemic will only generate more negative news headlines. In perhaps a re-run of the unregulated hedge fund failures in the 2000s that became the catalyst for the wide adoption of operational due diligence practices, we expect investors and their advisers in the retail fund market to follow the same route. 

Does regulation provide protection for retail investors?

As investors and their advisers scramble for information on fund performance and liquidity against a backdrop of unprecedented market volatility and losses, there is perhaps a misconception that regulated, liquid retail funds will always be well-governed, well-managed, and trusted investment vehicles because they have a regulated status.

Indeed, it has always been thought that their unregulated cousins registered in far flung jurisdictions are risky, illiquid and need operational due diligence (“ODD”).

Here lies the problem. There are certainly significant differences between regulated and non-regulated funds but the veneer of regulation is behind a historical over-confidence and complacency by investors in retail funds. At stake is the management of trillions of dollars of pension funds, ISAs and other such vehicles managing the savings of thousands, if not millions of people. Regulation provides rules on disclosures, governance and fund structure to improve outcomes and support market stability. However, regulation alone is not dependable and investors/advisers need to perform their own due diligence on all funds in order to reduce the risk of being involved in retail fund failures that are becoming increasingly common.

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