UK active asset managers will see their profit margins reduced by rules published last week by the country’s financial regulator, according to analysis by Moody’s Investors Service.
The credit rating agency also said the industry’s prevailing shift towards index-based investment would hasten as a result of the Financial Conduct Authority’s (FCA) actions.
The FCA set out a series of rules last Thursday for the country’s £8trn (€9.2trn) asset management sector, requesting firms to act in the best interests of the investors in their funds.
Moody’s said: “Although the new rules enhance transparency and protection for investors, active asset managers’ operating and compliance costs will increase and their fees will decline, reducing profit margins and accelerating the shift toward passive investment management.”
This would in turn have a negative impact on asset managers’ credit ratings, it said.
“Active managers… will have to overhaul their cost structures and product lineup or merge to offset the pressure on revenue and generate economies of scale”
The final rules from the FCA on governance will take effect on 30 September 2019, while rules forcing managers to return profits made from trading fund units (known as box profits) will come into force on 1 April next year.
“Active managers that have been experiencing an increase in operating and compliance costs following a number of local and global regulatory initiatives will have to overhaul their cost structures and product lineup or merge to offset the pressure on revenue and generate economies of scale,” Moody’s said.
The additional rules on delivering value to investors would reduce the fees charged by active managers as they would have to adapt their business models and product offerings to an even more competitive pricing environment, the agency added. Asset managers that provided the best value-for-money services would probably consolidate their market share as a result of the regulatory change.
“Bigger players with solid governance standards and diverse solutions in both active and passive management, such as [Fidelity] and BlackRock, will be best positioned to absorb the additional regulatory pressures,” Moody’s said.
“The introduction of these rules will increase fee and cost transparency, making the pricing of active funds more competitive and accelerating the shift to passive products.”