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We don't need more regulation: wealth boutiques' struggle in 5 charts

Think-tank NCI has highlighted how regulation is harming boutique culture in the UK, basing its case on five compelling pieces of evidence.

Excessive regulation

A 28-page report from the New City Initiative outlines the detrimental impact regulation is having on the investment industry.'

It describes regulation as 'excessive' with smaller boutique firms being 'suffocated'.

'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,' NCI chair Dominic Johnson said.

We highlight the five charts behind NCI's concerns.

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Excessive regulation

A 28-page report from the New City Initiative outlines the detrimental impact regulation is having on the investment industry.'

It describes regulation as 'excessive' with smaller boutique firms being 'suffocated'.

'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,' NCI chair Dominic Johnson said.

We highlight the five charts behind NCI's concerns.

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The inexorable rise of the compliance officer

NCI believes this chart reinforces its view that the rate of growth in the number of investment management firms has substantially slowed as a consequence of regulatory burdens, with a new ‘priesthood’ of compliance officers emerging from the financial crash.

‘As the regulatory regime becomes ever-complex and continually evolves, and the scale of potential punishments so damaging to small firms, the temptation is for compliance officers to engage in ‘gold-plating’ to avoid any possibility of failure to comply.’

NCI also highlights the FCA demands start-up firms appoint compliance consultants for a period of 6-18 months, resulting in more cost – typically £3,000 a month. ‘You can do nothing about this extra burden, only accept it. The sheer amount of paperwork is astonishing,’ NCI says.

‘All this means extra staff. In the early 2000s a new firm could get by with one staffer dedicated to compliance, legal, HR and operational risk management (internal audit), in addition to a COO.'

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Asset management start-ups stagnating

As a consequence the NCI is concerned by the noticeable stagnation in start-ups since 2009.

‘Start-ups are going to have as serious struggle unless they have a serious pool of cash, which they will quickly burn through,’ says NCI.

'It’s not just that the regulators are indulging in a belt-and-braces approach, as if terrified that fresh crisis is around the corner. It’s also clients who, in a post-Madoff world, are inclined to believe that everyon they is determined to rip them off’.

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FCA annual approvals in decline

This chart shows how FCA authorisations remain some way below their 2006 peak.

NCI suggests the climate is much easier for big firm to operate in. ‘Bigger asset managers have grown very fast and these firms are more able to absorb the costs of regulation (more people, more technology) than smaller. 'But the big players were once small companies, providing the kind of keen competition necessary to keep asset managers competitive and more likely to better serve clients.

The think-tank underlines the investment implications of this. ‘A monoclonal culture of massive investment houses, all offering remarkably similar products at commoditised prices and delivering commoditised returns, is threatening to overwhelm small and medium-sized firms and stifle new start-up firms.

‘The cult of the index – even though it negates any better return to the investor than the mean – seems firmly established with unspoken regulatory approval.

'If you go for beta, you cannot be blamed; going for alpha means going out on a limb. In today’s post-trust world, where investors can never be seen risking losing money, to do that could mean trouble for the regulator.’

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Approved persons

A legacy of this is a decline in the number of FCA approved persons.

One partner of a London-based asset management firm said in the report that ‘New firms, launching with investment teams that may not have already built up a pot of capital to work with, will struggle. 'The capital requirements imposed by regulatory authorities to start a new asset management firm in the UK have more than doubled in the past decade.'

They added: ‘Ten years ago, in 2005, we established a new associate firm with £445,000 of capital; our more recent associate firm was required to have £1 million of capital.’

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FCA authorised entities

This chart reinforces NCI’s view that the growth in the number of firms has slowed substantially due to the additional burdens.

NCI asserts: ‘The effort expended on bringing asset management under ever-tighter and costlier regulatory control is the result of a false narrative about the causes of the 2008 financial crisis, which could therefore have been prevented by better and more comprehensive oversight.

The body claims all asset managers, regardless of size, are struggling to survive and new start-ups are less commonly seen than consolidation between already existing partnerships.

‘This is a serious threat to competition – and a worrying development for consumers who have less choice. And, perhaps most important, it will damage returns for investors, precisely because there is plentiful evidence to show smaller, newer investment manager outperform larger, older ones.’

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