Skip to the content

UK fund industry “stagnating” because of regulation, say boutiques

08 December 2014

The New City Initiative argues that fund managers are increasingly reluctant to go at it on their own because the cost of compliance is too high.

By Gary Jackson,

News Editor, FE Trustnet

Competition within the UK asset management industry is at risk because of the regulatory burden being laid on smaller fund houses, according to a group of boutique firms, who warn that as a result the end investor could have less choice. 

A new paper by the New City Initiative (NCI) argues that the smaller end of the UK fund industry is “now stagnating” as start-up companies find the cost of complying with regulation is making it more difficult for them to get off the ground. 

The think tank, which aims to “give a voice” to independent, owner-managed firms, has made a series of recommendations on how the Financial Conduct Authority (FCA) can make use of “structural and cultural changes” over regulatory ones to strengthen the industry and better align its interests with investors’.

The group’s campaign comes while the Government pursues its UK investment management strategy, which was launched at the 2013 Budget by chancellor George Osborne to strengthen the country’s funds industry. This year has also seen a number of boutique launches catch investors’ attention, including Woodford Investment Management and Crux Asset Management.

The think tank said: “It is natural that encouraging the growth and diversity – for the minnows of today’s asset management world could become tomorrow’s mighty – of the investment management industry is a specific Government aim.” 

“This paper attempts to capture some of the difficulties faced by those who may be considering starting a new boutique asset management firm, or who are perhaps nurturing a recently-started firm through the difficult early years.” 

Offering evidence of how the regulatory burden on firms has increased in recent years, the paper says the number of compliance officers employed by the industry has more than doubled since 2001 - over which time the number of asset managers has fallen by around 20 per cent.



Source: NCI, FCA, Controlled Functions for Investment Managers


The NCI said: “Excessive regulation in the UK has led to a substantial rise in compliance costs and personnel. Compliance officers are the new ‘priesthood’ of the financial services industry. The increased regulatory burden has substantially damaged the competitive landscape through increased costs, time spent on compliance, and the imposition of unsatisfactory client suitability measures.”

Members of the NCI run about £400bn across the UK and continental Europe, with groups such as Fundsmith, Majedie Asset Management, Neptune Investment Management and Troy Asset Management being counted as members.

Among the recommendations made by the think tank are faster authorisation times from the FCA. The group says the authorisation process is “time-consuming and complex”, noting that a firm has to first go through the effort of setting up a fund before the regulator will authorise it.

“The application process is time-consuming and complex; it’s necessary to have a business plan, investment plans, and compliance procedures in place. And then you wait, for up to nine months. You cannot phone the FCA to ask how your application is faring,” the paper said.

“As one applicant for authorisation put it: ‘A helping hand along the way, that just doesn’t exist. If your application fails you may well have spent up to £30,000 on outside consultants to help you draw up the necessary documentation – quite an outlay just to put in your documents – and you may end up going to the back of the queue to get authorised.’”

One manager told the group they would never set up on their own because of the “months and months of enormous costs” that come when they are unable to market themselves and attract new clients.

Another recommendation is for the FCA to have “less determination to be seen as tough”, arguing that its eagerness to be seen administering stern justice does not help build constructive relationships with the industry.

FCA head Martin Wheatley said in 2013 that the watchdog would “shoot first and ask questions later” but the NCI says this stance is intimidating parts of the industry and is damaging the entrepreneurial spirit of the City.

“Much of what the FCA seeks to do – increase transparency, reduce unfair costs, and foster greater care in the treatment of clients – are ambitions that NCI members share. Our members are concerned however that ill thought through regulations are a serious deterrent to new start-ups, and hamper the growth of fledgling small firms,” the group argued.

Furthermore, the think tank wants the FCA to “explicitly encourage and nurture new start-ups”, adding that ways to do this include dropping the restriction that a new fund cannot be marketed before it is authorised and lowering “arbitrary” capital requirements.

“This would stimulate competition and ease the way for start-ups,” the paper said.


Dominic Johnson (pictured), chairman of the NCI and chief executive of Somerset Capital, said: “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 Financial Conduct Authority."

“We need more boutique asset management firms coming forward, to ensure this market remains highly competitive.”

“Fund managers who may like to start their own independent firm are currently reluctant to do so, not because of the uncertainties of the wider market, but because the financial cost of FCA authorisation is a serious disincentive.”

“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.”

 

ALT_TAG

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.