A report from the New City Initiative (NCI) has underlined the detrimental impact of regulation on the asset management industry.
In a 28-page paper titled ‘How regulation is damaging competition in asset management’, the think-tank calls for financial regulation to be more proportionately imposed on asset management firms as this would encourage more boutique asset and wealth managers to come the market.
NCI, which has 52 medium and small asset and wealth managers in its membership, also highlighted existing boutiques face the uncomfortable choice between the spiralling costs, or consolidation. ‘Financial advice will increasingly be determined by regulatory rules, rather than customised for individual clients,' it stressed.
NCI believes the industry is being 'suffocated' by 'excessive' regulation and said the compliance function for these firms has become increasingly onerous. It highlights several significant consequences of this stricter climate.
* New start-ups cannot support the financial costs resulting from increased regulation
* Boutique asset and wealth firms find burden of regulatory compliance increasingly onerous
* Since 2001 the number of UK compliance officers has more than doubled, while other asset management staff levels have declined by around 20%
* If regulation is not imposed proportionately on large and small asset management firms, fewer start-up firms will come to market, arresting competition and ultimately hurting choice for consumers
* The legal complexity of and the potential financial punishment for infringements of regulation pose massive obstacles to the growth of competition in this sector.
The UK investment management industry generates about 1% of GDP and London remains Europe’s leading centre for fund management, earning an estimated £12 billion a year for the UK. However, NCI fears the capital will lose its status as the hub for specialist boutiques in the harsher regulatory climate.
NCI chairman Dominic Johnson (pictured) said: ‘No-one is arguing for less vigilance by the financial regulators. It’s just that we want to see a more flexible attitude by the Financial Conduct Authority. We need more boutique asset management firms coming forward, to ensure this market remains highly competitive.'
He added: ‘Fund managers who may like to start their own independent firm are currently reluctant to do so, not because of the uncertainties of the wider market, but because the financial cost of FCA authorisation is a serious disincentive.’
Johnson pointed out boutique asset managers pose no system risk and described the negative impact of competition as a ‘perverse’ and ‘unintended consequence’ of the regulatory spread.
‘The difficulty of obtaining FCA authorisation, and the vast and growing costs of legal compliance, is ultimately against the interests of consumers, who will face a narrowing choice of firms to manage their wealth,' Johnson said.
NCI underlines how firms have met increasing regulatory requirements by making sure their compliance departments are well stocked.
‘In many ways the compliance function has become the new “priesthood” of financial services, with compliance officers tempted to gold-plate their adherence to regulations,’ Johnson pointed out.
‘Punishment for failure to comply can be so financially crippling that exceeding minimal requirements is now de rigueur.’
The paper also called for the development of global regulatory rules to eliminate the current uneven playing field, whereby European firms are conducting business under tougher rules than their American or Asian counterparts, putting them at a relative commercial disadvantage.
'Creating massive rulebooks which try to ‘head off at the pass’ any and all conceivable wrongdoing is an understandable response to the financial disaster of the past few years – but the risk is that tightening the rules without changing the culture will fail to prevent another crisis,' the NCI said.
'We need to get the culture and structure of financial services right – this is more important by far than the creation of endless rules that require teams of expensive lawyers to understand and advise on.
It added: 'The regulatory drive towards trying to eliminate all risk from the asset management industry is that, paradoxically, greater risk is fostered, as investors are funnelled towards so-called ‘model’ portfolios – including the ubiquitous index funds – managed by a handful of very large players.'