Since the financial crisis erupted, a common response has been calls for more regulations but unintended effects – such as higher costs to customers and weaker profits – need to be understood, argues Standard Life Investments.

In its latest Global Perspective Outlook report, the Edinburgh-headquartered firm looks at drivers of regulatory change and assesses the likely implications for investors. SLI, with £167.7 billion ($254.4 billion) of assets under management, is one of the UK's biggest investment houses.

"It is important however to be aware of the impact of unintended consequences arising from legislative change. For example, requiring much higher levels of bank capital runs counter to the call for banks to lend more to hard-pressed consumers and businesses," Mike Everett, governance and stewardship director, Standard Life Investments, said.

"We will continue to keep our clients informed of the significant impacts for them as the changes become more certain. Some of our clients may also wish to play a role in the consultation processes as legislation develops further," he added.

In recent years, a rash of regulations, such as the Dodd-Frank legislation in the US, or the Retail Distribution Review programme in the UK, have added to costs, helping to explain why cost-income ratios for wealth managers and other firms have risen, prompting speculation of more industry consolidation. New rules have also prompted growth in the whole area of compliance and even driven growth of firms specialising in helping financial organisations understand the rules.

As an illustration of the cost pressures on wealth management, last year’s annual survey of the industry by Scorpio, the research and consultancy firm, said the cost-income ratio for the 20 largest firms was 78 per cent in 2011, down from 79 per cent in the previous year. For all banks, the average ratio was 79 per cent. Swiss banks had an average ratio of 81 per cent.

Within the UK, the “true” costs to top-bracket wealth managers of obeying financial regulations were £420 million ($631.1 million) in 2011 and will increase further, according to a recent report by ComPeer, the research organisation.

Implications

History shows that post-crisis regulation often tends to go too far, as well as being backward-looking, and that unintended consequences can appear later, the firm said.

As an example, the proposed eurozone financial transaction tax is likely to have an impact on the cost of investing and market liquidity, the report said. The cost is currently unclear as it appears that the tax may be levied a number of times for one transaction. The European Commission assumes the macroeconomic impact of the tax will be only 0.28 per cent of GDP, but some analysts worry about second-order effects: the EC expects a 15 per cent drop in cash trading.

Banks continue to be significant parts of indices across Europe. New regulation, which impacts the business models of banks, could also dampen the future returns for long-term investors in equities, such as pension funds, Standard Life Investments said.