Think-tank calls for rethink amid wave of ‘detrimental’ regulation

The next five years look gloomy for boutique asset managers as firms prepare for a wave of new regulation, including a potentially “catastrophic” Financial Transaction Tax, a new think-tank report warns.

New City Initiative’s latest research, The Next Five Years: Regulatory Challenges That Will Impact Asset Managers, looks at the possible impact 10 incoming regulatory initiatives will have on the asset management industry, which it says will strongly impact boutique firms.

NCI says nearly seven years after the financial crisis regulators still do not appear to understand that “fund managers and banks are different entities” and pose a different set of risks.

“Regulation must be sensible and it must be proportionate. Most importantly, it needs to serve the purpose for which it was intended; to protect all investors and guard against systemic risk,” says NCI chairman Dominic Johnson. “As currently proposed, this host of regulatory initiatives will likely prove detrimental to the former, and do nothing to mitigate against the latter.”

In the report, the think-tank makes a number of recommendations that regulators need to address to ease the regulatory burden, ranging from the Alternative Investment Fund Managers Directive (AIFMD) depositary rules to the Financial Transaction Tax (FTT).

NCI says the FTT, which is a 0.5 per cent levy on financial instruments such as derivatives, would be “catastrophic” for major financial centres within the European Union.

The think-tank cites the example of Sweden, which introduced the a 0.5 per cent tax on the purchase and sale of equity securities in 1984. It subsequently doubled the charge, which led Swedish financial institutions to relocate, mostly to London. In Italy, where it has also been introduced, there have been “huge drops in trading volumes”, says the think-tank.

NCI predicts financial institutions could well relocate to the US or Asia-Pacific if the FTT is implemented.

The report also analyses AIFMD and rules on depositories, saying fund managers would need more clarity around depositary standards.

AIFMD, which became law in July 2013, seeks to improve investor protection by imposing new depositary standards through investor disclosure rules and mandatory client reporting.

Particularly, NCI asks regulators to clarify if they will “confirm or deny” their intentions to align the depositary rules of AIFMs and Ucits managers as they cover different markets with different risks.

NCI also highlights the Securities Financing Transaction Regulation, which will require financial institutions to report details of their securities financing transactions. The think-tank says this could further add to reporting costs.

If the SFTR is implemented both counterparties to a trade would need to report details on that trade, which would be “frustrating” for fund managers, NCI says.

Johnson says: “It is all too often the case that regulations within the financial services industry end up doing the opposite of what they are supposed do – namely destroying competition and making the large firms larger. This not only potentially reduces returns to investors, but also increases risk in the financial system.

“Despite this, too much of tomorrow’s regulation appears to be heading in the same direction. Risk will be better managed and greater transparency achieved through changing how people ‘think and operate’ rather than through more inefficient regulation.”

In July, NCI launched a report with think-tank Open Europe, saying UK asset managers that are directly or indirectly affected by EU regulation pay around £2bn a year to comply with the rules.

The think-tanks estimate that a UK-based fund manager marketing and distributing in all the other EU member states would face total initial costs of more than €1.5m (£1bn) and ongoing maintenance costs could be near €1.4m per year, the report estimates.  

NIC regulation