Small asset managers may be forced out of the market by MiFID II, according to think tanks New City Initiative (NCI) and Open Europe.
The NCI has said that EU regulations will introduce significant costs for UK asset managers and has called for the new rules to be reformed to preserve boutique firms.
Dominic Johnson (pictured), chairman of NCI, said: ‘The key trade-off for any business is that of costs versus income. The issues surrounding regulation are very similar – businesses need to operate in a regulated market, but the benefits of regulation need to outweigh the costs.
‘The investment management community and especially the ‘boutique’ community find that the regulatory burden imposed upon us by the EU is so expensive and onerous that in themselves these regulations are an issue in terms of our business sector prospering.’
One of the more widely discussed aspects of MiFID II, which comes into force in January 2017, has been its proposal to ban the use of dealing commission to help pay for external research.
According to the NCI, an outright ban would favour larger companies and disadvantage smaller managers which are unable to afford the extra costs of external research.
The NCI also criticised the FCA’s support of this ‘unbundling’ of research. 'The FCA should avoid gold-plating EU rules on investment research and instead make sure that any new measures do not overburden smaller asset managers,' it said.
The report recommends that the proposal be dropped and an alternative means to offer greater transparency to investors found.
The NCI also warned that because of the high cost of compliance, non-EU fund managers may be deterred from doing business in the EU, thereby removing significant capital entering the UK.
Costs of EU regulation
Johnson highlighted that in many cases the costs of regulation outweigh the benefits and called for a ‘proper’ open and free trade zone in Europe.
The report noted that although EU membership offers UK asset managers access to a large pool of capital, there are too many regulatory barriers to doing business across the union.
According to the report, the cost of AIFMD alone is around £1.5 billion a year for fund managers. EU laws are estimated to have introduced a total cost of £2 billion a year, not including the cost of the upcoming MiFID II or UCITS V.
Furthermore, a UK fund manager distributing and marketing across 27 EU member states and Switzerland faces an estimate initial cost of over €1.5 million (£1.04 million) and ongoing costs of close to €1.4 million a year.
The NCI set out a series of recommendations to address these issues. It recommends that EU-based asset managers which do not market their funds into other countries should be exempt from EU regulations. This would reduce the burden on asset managers, which would just be subject to their national regulations.
According to the report, in 2013, UK had €6.1 trillion in asset under management, accounting for 37% of Europe’s asset management industry. The UK financial services sector paid £65 billion to HMRC in the 2012-13 tax year, according to data from PwC, underlining its importance to the economy.