This publication has examined how a host of new proposals from the UK's financial watchdog could impact various players in the asset management industry.

The cost of complying with a raft of new regulations proposed by the UK's financial watchdog to reshape the nation's asset management industry could push smaller firms to the wall, one regulatory lawyer has warned. 

Yesterday, the UK's Financial Conduct Authority published the findings of a two-year investigation into the nation's asset management industry in its highly-anticipated Asset Management Market Study. In short, the regulator's message is clear: the industry is suffering from weak price competition and lack of transparency.

To address these issues, and a plethora of others, the FCA has drafted a string of proposals and consultation topics in a bid to benefit the end investor. 

Although the cost of complying with finalised proposals will eat into all asset managers' profit margins initially, the bite on smaller firms will sink deep and could cause them to lose custom, according to Cameron Brown, from law firm Foundry Chambers.

“Ultimately, it is going to impact the smaller managers most,” he told this publication. “If your profit margins are thin, you're going to look to pass [increased compliance costs] onto investors as quickly as possible, and this will inevitably cause some clients to move firms,” he said.

Brown continued: “I think there will be a certain degree of [client] movement in the market as the costs of all these proposals are borne.”

In the 114-page report, the FCA outlines its proposals to bolster the duty on fund managers to act in investors' best interests, hold managers to a high degree of accountability, and introduce a minimum level of independence in governance structures. 

All-in fee
The regulator is also rallying behind the idea of a single “all-in” fee to be paid by investors to make fund charging simpler. This concept, however, has been met with criticism and concern from certain industry participants, who argue a one-size-fits-all approach is not suitable.

“We firmly believe that investment advice should be a 'service', not a 'product', and it should be delivered and sold as such,” said Odi Lahav, chief executive of Allenbridge. 

Brown echoed this.

He said: “Generally speaking, these are very bespoke products and, therefore, one size does not simply fit all, and that's the difficulty.”

Juggling regulations
The regulator's recommendations come at a time when asset managers are grappling with a host new regulations, such as the second iteration of the Markets in Financial Instruments Directive, or MiFID II, and the General Data Protection Regulation, both of which will carve out a fresh regulatory landscape for asset managers to navigate. 

Brown, who has vast experience in financial crime and has prosecuted on behalf of the FCA, explained that while the larger players will likely adapt quickly to the FCA's changes, those at the lower end of the spectrum will “find it much harder to react” due to lacking resources and capital. 

And while the FCA is seeking to make investing fairer for the end client, there is a risk that managers will simply “repackage” inflated compliance costs and pass the bill onto their clients, Brown said. 

“It all comes back to managers being expected to do more,” he said. “If they're expected to do more work to comply, [management] costs will be higher and, ultimately, this will be passed onto investors. That's simply the price of more regulation.”

Regardless of how the situation pans out, the stakes are high.

The UK asset management sector is the second-largest in the world, overseeing around £6.9 trillion ($8.9 trillion) of assets. More than £1 trillion is managed for individual retail clients and £3 trillion for UK pension funds and other institutional investors. The sector also manages about £2.7 trillion for overseas clients. The FCA report studied more than 20,000 share classes and 30,000 investment strategies. 

Competetive pricing
Although it is evident, according to the FCA, that the industry is not competitively priced, Brown has questioned the ability of bolstered regulation to correct this.

“There may be weak price competition, but changing a market using regulation is quite a difficult thing to do,” he said. “How do you [use regulation] to encourage parties to compete on price? In practice, it is hard to police.” 

Patricia Regnault, Europe head of asset management at Linedata, a technology provider to the industry, has stressed that asset managers should embrace increased fee transparency. 

“At first glance, the requirements for increased transparency on prices look tough for asset managers,” she said. “But if we take a step back, these proposals should help the buy side industry to remain sustainable and grow stronger.”

She continued: “Why should the active asset managers be afraid to communicate the real price of the services that they deliver? The large majority provide a high level of expertise combined with great professionalism to help investors achieve their goals. Investors accept that they have to pay for specialised, quality investment services.”

Independent governance
Another of the FCA's proposals outlined in the report is to establish independent governance boards that better scrutinise the industry. 

The FCA suggests changing “the composition of existing governance bodies to create more independence” while the “existing AFM board structure could be reformed to mandate it to have a majority of independent members and an independent chair”.

Brown strongly supports this idea.

“It would be broadly helpful having independent boards,” he said as it would “increase accountability” while placing a “much greater degree of scrutiny” on the industry.

Will Goodhart, an executive from CFA Institue, a global association of investment professionals, welcomed the notion of more independent governance with open arms. 

He said: “It’s a shame that the focus is on the all-in fee. Governance is the real story and here the FCA has got it absolutely right. There’s been too little independent oversight of the way in which investment vehicles are managed. Strengthening the governance requirements – dealing with the root cause rather than with the symptoms – will improve client outcomes.”

Brown cautioned, however, that while independent governing bodies would “pick up wrongdoing much quicker”, they require a hefty amount of funding, and the investor could end up bearing the brunt of the cost.