NCI: Crippling regulation costs are holding back new boutique launches

Fund managers who want to set up their own independent firms are reluctant to do so owing to the financial cost of FCA authorisation according to a report from the New City Initiative.

In its policy paper entitled How Regulation is Damaging Competition in Asset Management, the NCI says that new start-ups cannot support the financial costs from increased regulation. As such it is calling for financial regulation to be more proportionally imposed on asset management firms, as it would encourage more boutique and wealth management firms to come to market.

According to the report 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 and are considerably more onerous than in the US.

For example the NCI says that in 2005 it established a new UK associate firm with £445,000 of working capital, whereas its most recent associate firm needed £1m of capital.

“New UK firms are required to have an increasing amount capital in place right from the start, for working capital requirements, regulatory minimums, and stress-tested capital resulting from ICAAP shut-down assumptions,” the report says.

In addition UK firms are subject regular, on going costs, which according to those firms spoken to in the report have grown “considerably” in recent years.

Dominic Johnson, chairman of the NCI (pictured), says: “No-one is arguing for less vigilance by the financial regulators. It’s just that we want to see a more flexible attitude by the FCA.

“Boutique asset managers pose no systemic risk. The difficulty of obtaining FCA authorisation, and the vast and growing costs of legal compliance, is ultimately against the interests of consumers, who will face a narrowing choice of firms to manage their wealth. This is a perverse and unintended consequence of the regulatory spread.”

In addition to other measures the NCI says to stimulate competition and ease the way for new start-ups, the FCA could drop the restriction that a new fund cannot be set up and/or running prior to applying for authorisation, allow pre-authorisation marketing and lowering the capital requirements.