UK asset managers that are directly or indirectly affected by EU regulation pay around £2bn a year to comply with the rules, according to a new study by two UK think-tanks.
Open Europe and New City Initiative have published the Asset management in Europe: The case for reform report which calls for a ’genuine’ single market and more targeted EU regulation for asset managers.
The think-tanks, who finalised the report in May this year, 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). The total ongoing maintenance costs of distributing in these countries could be near €1.4m per year, the report estimates.
“The main EU regulations directly or indirectly impacting the UK asset management industry come with an estimated cost of around £2bn a year,” says the report.
NCI chairman Dominic Johnson says the point of the report is “to try to get people to change their mind” on how EU regulation works for asset managers. “We are saying very clearly that Europe isn’t a free market for financial services and asset managers in particular,” he adds.
The renegotiations of Britain’s membership to the EU could be an opportunity to try to reform some regulations within Europe, he adds.
Among the recommendations outlined in the report are the removal of national barriers to the distribution of funds domiciled in other EU member states, as these barriers are against “the spirit” of the single market.
RPC counsel Marcus Bonnel believes that as part of capital markets union there are more regulatory barriers for asset managers compared to other financials services sectors.
He says: “It is true that the level of harmonisation has been less in asset management than in other areas of financial services. The point is, are those barriers justifiable?”
For example, the report suggests EU-based asset managers who do not market their funds into other EU countries should be exempted from EU regulations as they take no advantage from the passport.
Johnson adds: “I was amazed to discover how un-free, expensive and uneven the eurozone is for marketing and distributing asset management products. We suffer a huge amount of totally unnecessary and very burdensome regulation.”
“A lot is misunderstood with many rules not evenly applied and they also have elements of protectionism,” Johnson adds.
The report states that some regulations such as the Alternative Investment Fund Managers Directive and rules on depositaries have protectionist elements to them that should be removed.
The 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.
According to Aifmd rules, each alternative investment fund has to have, among other requirements, a depositary monitoring cashflow and looking after the assets, adding further costs.
At the moment, Aifmd applies to any fund manager that manages total assets worth €100m or more. The think-tanks suggest this threshold should be raised to €500m.
Additionally, the report asks for the idea of the Financial Transaction Tax to be dropped, which is estimated to cost €38bn a year, of which €15bn would have been paid by investors on the sales and redemptions of UCITS shares.
Christopher Sier, managing director for the UK at KAS Bank, a securities service, says a unification on rules is necessary, which is evidenced by the UK Investment Association’s work on assessing the impact of the costs of Mifid II.
He adds: “The big barriers I think are not within the EU region but more between the UK and the rest of Europe. That’s were the unification has to come.”