Industry commentators have warned the UK asset management industry must brace itself to cope with rising costs and intensifying regulatory headwinds after the Financial Conduct Authority (FCA) unveiled a package of measures to address "weak competition" in the market.
In the Final Report of its Asset Management Market Study, published last week, the FCA said it supported plans for an 'all-in' fund fee, which will include an estimate of transaction costs.
The regulator will also require fund managers to appoint a minimum of two independent directors to their boards in order to bolster fund governance, while it will consult on proposals to introduce a new rule requiring the authorised fund manager to assess whether value for money has been provided to end investors.
Meanwhile, the FCA is considering changing the rules to ensure any risk-free box profits are used solely for the benefit of the fund, and cannot accrue to the asset manager.
The regulator estimates ongoing costs of £27.7m as a result of its proposals on fund governance and the 'value for money' rule alone (which are expected to be passed onto investors), while groups would also incur a one-off charge of £6.7m.
Meanwhile, firms could face upwards of £20m losses of risk-free box profits per year.
Commenting on the proposals, analyst Liberum identified the most immediate impact on certain firms' profitability is likely to be the requirement to return risk-free box profits to the fund.
"We are unsure as to what is likely to constitute 'risk-free' and whether or not this will lead to a change in behaviour on the part of managers.
"However, while this issue has been flagged before we believe that box profits have accounted for c.10% of group profits in some circumstances in recent years."
Moreover, it said there is also little doubt the measures will "add to the administrative burden for fund managers and ultimately result in increased cost" over time.
Meanwhile, although Christopher Woolard, FCA executive director of strategy and competition, emphasised last week the regulator was not advocating passive funds over active strategies, some commentators have highlighted the added pressures its latest proposals will exert on active managers in particular.
Marina Cremonese, Moody's vice president-senior analyst, said: "Momentum in the shift to passive investing accelerated with the FCA's proposed remedies, which will negatively pressure active asset managers' profit margins.
"Initiatives like these which aim to promote transparency of fees [combined with other new regulatory rules such as MiFID II] will lead to greater usage of lower-cost passive options where there is significant room to grow."
Concerns were also raised about the extra work needed by fund groups to meet the new requirements, many of which are still being consulted upon, as they also rush to meet MiFID II deadlines and face further uncertainty from the ongoing Brexit negotiations.
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