Last week’s Asset Management Market study by the UK’s Financial Conduct Authority (FCA) proved that there is no shortage of definitive winners and losers. The report reveals seismic changes for the UK’s £7.0 trillion ($9.0 trillion) industry, part of the regulator’s latest efforts to police the asset management industry.
The UK’s asset management industry is the second largest in the world, currently managing around £7.0 trillion in assets. Of this figure, over £1.0 trillion is managed for UK retail (individual) investors and £3.0 trillion on behalf of UK pension funds and other institutional investors – additionally, the industry also manages around £2.7 trillion for overseas clients.
While asset managers offer a variety of services, including searching for return, risk management, and overall administration, the risk has been generally borne in its entirety by investors. Consequently, the FCA conducted a market-wide asset management study back in 2015 to measure the value asset managers deliver for both retail and institutional investors – this report has since spawned additional consultations and interim studies.
As a result, the FCA unveiled a laundry list of new regulations for the asset management industry, which was widely expected from an assortment of managers, consultants, and hedge funds. A primary finding that drove the FCA to launch the new measures was the impact of weak price competition in a number of areas of the asset management industry.
This served as a strong impetus that ultimately sculpted many of the regulations that are outlined in greater detail in the FCA report. While the regulatory overhaul took few by surprise, the treatment of asset managers themselves seems somewhat surprising given that many actually can continue their business operations relatively unscathed.
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Winners and Losers
The asset management industry was the focal point of the market study and consequent regulatory framework. As such, the emphasis on these managers proved to actually be a double-edged sword – a revelation most venues in this space are happy to accept. An earlier report portended wide-ranging changes for asset managers, but these are more muted in the most recent iteration.
For example, the FCA’s endorsement for an all-in-fee was an expected setback for asset managers, though the greatest blow appears to be levied on investment consultants and hedge funds. Many asset managers felt the FCA proposals were broadly in line with what they had been predicting, according to a Bloomberg report.
That being said, asset managers will have to overcome rising regulatory costs. Moreover, FCA is still considering whether it would obligate money managers to return to the fund any so-called box profits, which are generated from the spread between bid and offer prices. This singular rule alteration could ultimately cost asset managers at least £20 million pounds a year, per FCA estimates.
Without a doubt the main winner of the new regulatory shakeup from the FCA are investors themselves. A dearth of competition was cited repeatedly as a primary catalyst for change. The new regulations will thus help kindle competition and cut costs for investors in the asset management industry.
The biggest losers with the new regulations appears to be investment consultants, a segment that just appears to be changing given upcoming verdicts from the Competition and Markets Authority. Additionally, lingering concerns of fee structures, market concentration, and fiduciary management serve as a prelude rather than a conclusion for investment consultants following the FCA report.
Finally, the regulatory changes could also target hedge funds and other private equity firms. These alternative asset managers are likely to draw additional regulatory scrutiny for unclear fee information.
Last week, the FCA also unveiled a statement that it would delay the implementation of new rules on forex and CFDs trading. The news followed the European Securities and Markets Authority (ESMA) publishing a brief statement on forex, CFDs and binary options brokers, explaining that it is concerned about the effectiveness of the current regulatory framework.