Financial Supervision Authority imposed stricter requirements for risk management and disclosure on investment and pension funds
New guidelines of the Financial Supervision Authority, "Requirements for management of risks related to investment of fund assets and ?Recognition of risks in the investment fund's prospectus", set out significantly stricter requirements for management of risks related to investment activities, as well as the manner in which risks are to be disclosed to unit holders.
"Management companies must substantially improve the quality of their risk management. Risk management practice, which has undergone a test under the conditions of severe economic and market slowdown, must be reviewed to better protect the interests of unit holders," commented Kaido Tropp, member of the management board of the Financial Supervision Authority.
Guidelines of the Financial Supervision Authority set out more detailed requirements for identification, monitoring and measurement of investment risks by management companies. The guidelines specify, among other things, requirements for the internal regulations of the management company, responsibility of the management board, activities of the risk management unit and recognition of risks in the prospectus of an investment fund. For example, the description of investment objectives in the prospectus of an investment fund must definitely include a reference in the future to more detailed descriptions of risks related to investments. It is not allowed to emphasise the potential benefits arising from investments unless the same place in the prospectus includes a clear reference to risks related to the investment. It is recommended to separately emphasise risks arising from the nature of a particular fund, etc.
The Financial Supervision Authority believes that in light of the interests of unit holders the current legislation also needs amendment, including unambiguously sanctionable violation of the risk management requirements. The Financial Supervision Authority has submitted the relevant proposal to the Ministry of Finance.