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Special Report

Impact investing


European regulation could trigger fund manager consolidation – report

New regulatory frameworks in Europe could cost the fund management industry $300m-500m (€221m-370m) per annum over the next three years and will inevitably lead to increased consolidation, a new report has found.

According to a study entitled ‘The impending profitability challenge for European fund managers’, conducted by BNY Mellon and Ernst & Young (EY), complying with multiple regulatory measures will represent the biggest cost for European fund managers.

They estimate that the cumulative additional costs of the regulations directly applicable to European fund managers lie within a range of $0.3bn and $0.5bn a year over the next three years, which would represent a more than 3% increase in cost/income ratios.

The report stresses that each firm will be challenged to find diverse methods of delivering its regulatory programmes.

While medium-sized entities might be penalised in terms of consultancy spend, headcount or capital provision, larger firms have bigger budgets but undoubtedly bigger compliance issues due to the complexity, geographical spread and volume of their product ranges, the report says.

However, it also notes that potential revenue opportunities may be uncovered by offering value-add services to fund managers, such as financial planning or decumulation products.

But this also means regulatory pressure may lead to increased consolidation of asset management firms and create significant barriers to entry, as small firms struggle to survive.

The report, which concludes that larger fund managers will benefit from their robust risk infrastructures and offering multi-asset products, goes on to say that managers need to take a “holistic view” of their 3-5 year regulatory compliance plans.

“In general, costs have been managed well since the credit crunch, rendering further reduction initiatives harder to identify and implement,” it says.

“Consequently, firms will have to be creative to manage revenue up, and costs continuously down, constantly challenging their business models and looking for short-term opportunities to aggressively restructure their funds ranges.”

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  • QN-2546

    Asset class: Real Estate Equity Fund (non listed).
    Asset region: Europe.
    Size: Total CHF 600m, approx. CHF 100-300m per fund investment.
    Closing date: 2019-06-28.

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