The Financial Conduct Authority (FCA) has published a list of the top five assets that it believes are eligible for a new financial asset definition.
The new asset definition will include financial assets such as fixed income and securities.
Finance Minister Bill English told MPs in the Commons on Wednesday that the new asset will “improve the way we manage our financial assets” and will “help us achieve our long-term objectives of increasing our domestic investment and productivity”.
“The Government has taken action to introduce a new asset class that will help us achieve its long-range objectives of reducing debt, boosting our economic productivity and helping to drive long-run economic recovery,” he said.
The FCA said the new definition will allow asset managers to better manage the portfolio of the asset classes they manage, such as pension funds, insurance companies and asset managers.
The new definition comes after a Treasury report found that the “risk premium” of fixed assets was the biggest risk for a UK economy.
It also came after the FCA reported that there was a risk that the risk premium on UK debt was set to increase over the next decade.
“The risk premium is expected to increase from around 0.5% to around 5% over the medium term,” it said.
“The cost of servicing this risk premium will increase as the risk of default increases, and the financial risks of UK government and company assets increase.”
The FCO said that it expects the risk-premium of the UK government to rise from 0.2% in 2020 to 1.5%.
“This will have a knock-on effect on the cost of UK Government debt and its associated cost of funding the government’s operations,” the FCO added.
‘High risk’Asset managers have warned that the definition will leave some asset classes “in a high-risk situation”.
“A high risk asset class is defined as one which has a significant financial risk profile, or a risk which would be likely to increase in the future,” the Financial Conduct Agency said.
“An asset class will have more than one risk premium, and each risk premium must be individually identifiable.”
It said that the UK could face a risk premium of 1.8% over a decade.
The FCP said that some asset types such as mutual funds could be “highly leveraged” due to the “substantial” debt in the asset class, with the FCP warning that “any excessive leverage in an asset class could cause significant adverse consequences to the financial stability of the financial system”.
“It would be inappropriate to categorise these types of asset classes as high risk, because they are not,” the report said.
The report also warned that financial assets that have a high risk of failure or failure-through-otherwise could become “too risky” in the long term.
The Treasury report said that a significant proportion of asset management funds have assets in fixed income, with fixed income having a “substantially greater risk premium” than bonds and commercial paper.
“These funds are currently subject to a risk-based valuation approach that is not appropriate for the fixed income asset class,” the Treasury said.
“They should be considered as being high risk and should be excluded from this asset class.”
The Treasury added that it is also looking at the possibility of changing the asset classification from a fixed income to a commercial-scale investment asset.