In a speech, at London Business School’s Annual Asset Management Conference this week, Mr Bailey said he was especially worried about PRIIPS and ETFs
He said new PRIIPS rules could put off US investors and that the sector should be “watchful” over ETFs.
He said: “I want to be clear that I am concerned about PRIIPS, and I know I am not alone.
“It carries a risk that it is leading to literally accurate disclosure which is not providing useful context, and there is evidence that funds, for instance from the US, are withdrawing from Europe to avoid the burden.
“I have also heard concerns about performance projections. We all have to take this seriously.”
He said the FCA would work with European Supervisory Authorities and contribute to the European Commission’s post-implementation review of the PRIIPS Regulation to allay concerns.
Turning to ETFs, Mr Bailey said: “The secondary market liquidity of ETF shares is dependent on market makers and authorised participants (known as APs).
“We know relatively little – as we have not experienced a stress since this structure grew so rapidly – about the capacity and willingness of APs to execute their function in stressed conditions where they may be under pressure to tighten their own risk limits.
“The result could be unexpectedly large discounts for ETF investors selling their holdings relative to the estimated value of the underlying assets, and possibly a need to suspend fund dealings.
“As with open-ended funds, this could have the potential to amplify shocks to market conditions which are already under stress.
“We have no easy way of sizing this risk, but we cannot ignore its potential given the rapid growth of ETFs.”
He also spoke about MiFID II, which he said was “probably the largest single change ever in European financial market regulation.”
He revealed that it was a priority of the FCA to implement it in a way that did not stop the effective functioning of markets, but hinted at flexibility by adding “to implement rules in a market that wasn’t functioning would be - at it’s kindest - getting the cart before the horse.”
Elsewhere in the speech, Mr Bailey spoke about the outlook in the wake of the financial crisis and the Brexit vote.
But he sought to address trends which moved away from these issues and “put Brexit to one side.”
Chief among these was a demographic shift, with a growing number of people reaching retirement and a knock-on effect of “a shift in the balance of assets under management from accumulation-oriented products to decumulation products, including a variety of income drawdown strategies”, some of which he said are likely to be “complex.”
He backed placing more responsibility onto individuals over their pensions, but warned the industry must ensure there is a framework where choices can be made “securely and confidently.”
Mr Bailey noted the decline of defined benefit pensions and the growth of defined contribution schemes was allied to the trend, leading to a range of changes in the sector.
He said: “The big point that I would draw out is that there continues to be a major shift towards placing more responsibility for decision making onto individuals.
“We have seen that happening for some time in the accumulation phase of saving for retirement. Now, we are seeing the similar change in the decumulation phase as people exercise choices over when and how they draw pensions.
“Given the implications of an ageing population, low real interest rates and the cost of old age, it seems to me that greater choice makes sense in terms of individual circumstances and preferences.
“But it places a responsibility on industry to provide products and the regulator to establish conditions in which those choices can be made securely and confidently.”