Compliance
Red Tape Squeezes Investors' Choices, Creates New Risks, Think Tank Warns

After its recently-published report, New City Initiative talked to this publication about the malign impact of the raft of regulations that have been rolled out since the 2008 crisis.
New City Initiative, a think tank for wealth managers in the UK, recently urged regulators to impose less onerous regulations on smaller firms, arguing that a one-size-fits all approach squeezes competition to the benefit of larger, incumbent organisations.
The organisation’s paper, M&A in Asset Management: Is it strangling boutiques?, looks at what drives mergers and acquisitions in the sector, noting that a rising pile of European regulation is a big factor at work. It cited figures from Mercer Capital showing that deal volume and deal count last year hit the highest levels since the post-crisis year of 2009.
“Regulations in the EU have been particularly intense for asset managers, with rules such as AIFMD, MiFID II, EMIR, UCITS V, GDPR and PRIIPs all collectively affecting fund manager margins. For many firms struggling under the weight of these complex regulations, consolidation is often seen as the best option,” the report said.
NCI worries that if investors can’t access as many small and medium-sized firms as before, they may struggle to get the diverse portfolio options that come from niche strategies.
WealthBriefing this week spoke to Jamie Carter, chairman of New City Initiative, about the report and why it decided to look at this issue.
What prompted NCI to produce this
paper?
Conversations with members and recent articles and comment on the
M&A trend within the industry. Much has been written about
the need for scale in order to tackle rising costs and continuous
fee pressure, but there has been very little analysis on what
this means for the industry and its customers as a whole, and
whether M&A and a race for scale is really in the best
interests of savers/consumers.
How serious will it be for there to be a gulf between
large and small firms as a result of regulation? How much
concrete evidence is there to show that service levels and
quality is being hit because of this?
We are not suggesting that service and quality levels are being
hit - we are saying there will be less choice and access to
specialist products, as the barriers to entry are getting higher,
and probably less innovation as that tends to go hand in hand
with smaller firms. As the entire value chain for the asset
management industry consolidates, the end savers will have less
and less choice and consequently will be invested in more vanilla
products, with less diversification and potentially lower
returns. As we note in the paper, there have been studies which
show that boutiques outperform their larger counterparts as they
tend to have a stronger alignment of interest with their clients,
they manage capacity more tightly, and tend to specialise in a
small number of activities where they have an edge over the
competition.
Are there specific types of wealth management function
that are suffering particularly because of this disproportionate
impact of regulations, as set out?
Smaller firms right across the value chain are suffering, from
IFAs through to private client wealth managers and institutional
asset managers. At every level, post-crisis, the amount and
complexity of regulation has increased hugely, so the associated
costs have too. The burden has become so large that IFAs are
exiting the industry or having to tie up with larger firms or
networks to ease that burden. The same is true of wealth
managers, which are hoovering up IFAs and competitors to give
them scale that can more easily absorb the costs. There are a
number of problems that result from this, but two key problems
are:
1) As the administrative costs of giving good, bespoke, financial advice to individuals rise substantially, firms will focus on wealthier individuals only. The remainder, who you might argue are most in need of financial advice, are least likely to be able to get it.
2) As the pools of capital held by wealth
managers and on platforms get larger and larger, in order to keep
costs down and benefit from economies of scale, they need to
reduce the bespoke nature of advice and provide more homogenous
advice/service (for example, by limiting the number of asset
managers they allocate to). They are therefore allocating larger
and larger amounts of capital to investment strategies, and thus
need fund managers with lots of capacity available. Fund managers
with less capacity, or greater discipline about how they manage
it, cannot access these pools of capital.
What hope can NCI have that its case will be heard in the
current climate? How does Britain's possible departure from the
EU factor into its thinking (given that Brussels has driven much
of the legislation you cite, such as MiFID II)?
The coverage our paper has received suggests people will listen,
given the importance of the asset management industry to the UK
(partly from a job creation, tax revenue and export perspective,
but most importantly in terms of engendering a savings culture
and ensuring people have provided for their retirement). We have
been engaged in regular dialogue with the FCA, who to their
credit are listening, but we recognise that whilst we are members
of the EU there is a limit to what the UK can do. However,
if/when we exit, depending on the terms, we should have more
freedom to tackle this. We are also due to meet HM Treasury next
month and will be making the case to them.
Are there specific examples of adjustments in regulations
that you favour that have been adopted in other parts of the
world which you would give as examples to emulate?
The specifics will depend on the type of Brexit, but what we are
really advocating is for greater proportionality in regulation
and a greater emphasis on principles, rather than prescriptive
rules. Andrew Bailey, CEO of the FCA, has made similar comments.
The reality is that an asset management firm with ten clients,
all of which are large, sophisticated pension or sovereign wealth
funds, does not need to be regulated in the same way as a firm
with 100,000 clients which are a mix of institutional and retail
investors, and the regulatory framework needs to be adjusted to
account for this.
Is the problem one of there being too many rules in
general, and that lawmakers should focus on punishing force,
fraud and theft, create rapid enforcement, and otherwise get out
of the way? Also, is there a need to encourage ownership models
in which managers have to "eat their own cooking" or have "skin
in the game" so they are less likely to damage
clients?
Yes - there are too many rules, some of which are complex and
lack clarity, and others which have unintended consequences and
appear to serve little purpose. The ownership model is critical.
NCI was formed in 2010 as a response to the fallout from the
financial crisis because all financial services firms were
considered part of the same bucket. NCI argues that firms with a
high degree of owner-management foster an independent and
entrepreneurial culture, which not only creates growth, jobs and
value-add for the economy, but also tends to have a different
approach to risk on account of that strong alignment of interest
with customers. Owning a meaningful stake of the firm you work
for means that your individual reputation is completely
intertwined with that of the firm, and as a result your approach
to risk and the actions of your colleagues reflects that.