Asset managers have reiterated concerns about increased regulatory overheads following a prediction that the unbundling of research costs required under Mifid II could wipe nearly 30 per cent from fund house profits.
Under the EU rules, due in early 2018, asset managers will need to separate payments for investment research from the fees they pay brokers to trade securities.
Concerns over the impact of this overhaul, confirmed by the FCA last month, were voiced in a paper from Crisil. The S&P Global company predicted European fund houses could see operating profits drop by between 17 and 29 per cent because of the changes.
The predicted impact on consumers and fund buyers is viewed more positively.
In its latest consultation, the FCA claimed its proposal that firms pay for research directly or via the creation of research payment accounts (RPAs) could result in more “cost-efficient and price-competitive” services for consumers.
But this comes amid a broader clamour over the cost of regulation. Last week, Schroders public policy head Sheila Nicoll warned the European Parliament of growing costs, highlighting recent uncertainty over the Packaged Retail and Insurance-Based Investment products (Priips) regulation.
“The uncertainty around the timetable for Priips is costing us a lot of money,” she said. “In order to meet the January timescale, we are diverting money and resources to manual workarounds that hopefully allows us to meet the deadline.
“The uncertainty around the timetable is going to add to the costs that inevitably get passed on to investors.”
Some commentators are more positive about the side effects of regulation, however.
Vicky Sanders, co-founder of RSRCHXchange, noted that while some Mifid technicalities could prove difficult – including working out research budgets in the fixed income space where these costs had been historically paid from the bid/offer spread – asset managers could mitigate the impact of the rules.
“The buy side will look at reducing their costs,” she said. “They could make their research organisation more productive or renegotiate [research costs].”
Ms Sanders added the changes around costs could also spur research innovation.
“Researchers are realising they are going to have to do something that’s niche and [added value] – it can’t be a cookie-cutter format,” she said. “There’s a lot of innovation on the research production and research delivery side.”
In its report, Crisil noted that although asset managers had been facing “many challenges such as falling fees and increasing preference of investors for passive products”, operating margins had remained resilient at about 30 per cent, driven by cost control and growth in assets under management due to capital appreciation.
The firm has now warned that this could change, and added: “Under our bear case, operating profits will decline by 29 per cent, assuming that asset managers have a higher exposure of 40 per cent to equity and research spending remains 100 per cent of current levels.”
35-60: Number of brokers used by US asset managers for research/advisory services according to Crisil, which says this is “broadly representative” of the situation in Europe