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Six regulatory pleas to save the investment boutique

Think tanks New City Initiative and Open Europe believe the cost of regulation outweighs the benefits and lists six recommendations to keep the boutique afloat.

The New City Initiave (NCI) and Open Europe have partnered up to publish a report on the impact of European regulation on smaller investment firms in the UK.

The report, titled Asset Management in Europe: The Case for Reform, argues that the costs of EU regulation are too burdensome and there is need for reform.

The think tanks have made six recommendations in order to decrease this burden and in the process save the smaller asset management sector from being forced out of the market.

Dominic Johnson, (pictured) chairman of the NCI commented: 'We do believe that bigger, freer trade zones, properly regulated, are highly desirable for all members of the New City Initiative and we hope that our thoughts here help us achieve this goal.'

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The New City Initiave (NCI) and Open Europe have partnered up to publish a report on the impact of European regulation on smaller investment firms in the UK.

The report, titled Asset Management in Europe: The Case for Reform, argues that the costs of EU regulation are too burdensome and there is need for reform.

The think tanks have made six recommendations in order to decrease this burden and in the process save the smaller asset management sector from being forced out of the market.

Dominic Johnson, (pictured) chairman of the NCI commented: 'We do believe that bigger, freer trade zones, properly regulated, are highly desirable for all members of the New City Initiative and we hope that our thoughts here help us achieve this goal.'

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Remove national barriers to distribution of funds

NCI suggests that a single market for EU-based fund managers is not working smoothly. Although the 'passport system' envisaged by Ucits IV and Alternative Investment Fund Managers Directive (AIFMD) is a benefit to asset managers, additional requirements to EU legislation imposed by national regulators negate the benefits.

Therefore, the think tank has recommended that barriers should be scrapped. Additional charges on fund managers based in other EU member states make it expensive for them to passport funds into multiple countries.

Currently the initial cost of distributing a fund across the EU and Switzerland is €1.5 million (£1.04 million). The ongoing costs are €1.4 million.

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Raise the threshold for 'de minimis' exemption

The think tank recommended that the threshold for the 'de minimis' exemption in the AIFMD should be raised to €500 million. The current threshold is €100 million (£69.6 million) assets under management.

This would remove fund managers who are unlikely to pose a threat to global financial stability from the directive. The AIFMD costs close to £1.5 billion a year based on figures from the UK government's Regulatory Impact Assessments.

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More transparency with flexibility on dealing commissions

NCI highlighted that forcing asset managers to pay for research from their own resources under Mifid II could have significant unintended consequences.

While agreeing that further transparency would be beneficial, it noted that there should be a compromise building on the existing Commission Sharing Arrangements. These arrangements provide asset managers with more control over payments and shows a clear seperation between trading execution and investment research costs.

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Exemption for fund managers without 'passports'

Another recommendation from the NCI to decrease the burden of EU regulation on smaller asset management firms is to grant an exemption to fund managers who do not do business with the rest of EU

The think tank suggested that fund managers which do not market to other EU countries should be exempt from AIFM or Ucits Directives. It pointed out that since they do not make use of the 'passport system' that is considered to be the most beneficial aspect of EU financial regulation, they should not have the burden of higher costs.

The exemption would be for asset management firms that are based in their home member state and they would only have to register with their national regulator.

'The exemption could help reduce the risk of consentration in the asset management industry. Managers of smaller funds would see their regulatory compliance costs reduced, and would therefore have less incentive to merge with bigger funds,' the NCI said.

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Drop the Financial Transaction Tax

The Financial Transaction Tax (FTT) proposes to tax certain financial transactions such as secondary trading of shares, bonds and derivatives, where there is a connection to at least one of the member states implementing the tax. The NCI argued that this will be 'hugely harmful' for the European asset management sector.

The research points out that the estimated annual cost of FTT would be €38 billion (£26.4 billion).

It said: 'The UK and other have made it clear that they would not sign up to the FTT. Yet, the levy would still hit investors and fund managers in the participating EU member states. 'Therefore, we suggest that the FTT be dropped altogether.'

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Less paperwork for Ucits only marketing

According to EU rules, Ucits funds need to have facilities available in the member state they are marketing their units in to make payments. Therefore they need to appoint a 'paying agent' based in each state they want to sell their units in.

This brings with it additional costs for fund managers. The NCI report points out that for example in Croatia, fund managers are required to pay a fixed agency fee of 0.3% of the fund assets for each Ucits. The think tank agrees that the recuirements make sense for funds that are sold to retail investors.

However, it notes that funds marketed to professional investors could receive an exemption thereby decreasing the cost burden on the fund managers.

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