Asset Managers Face Some Difficult Decisions

2017 is proving to be a stressful and costly year for asset managers. The terms of the UK’s exit from the EU will continue to be the subject of extensive debate, both politically and in the press. At the same time, MiFID II is just around the corner, coming into force in January 2018 after having been put back a year due to the complexity of its implementation.

MiFID II recasts and broadens MiFID (the EU’s Markets in Financial Instruments Directive) in response to the financial crisis. It will change the way asset managers operate and not just in terms of enhanced investor protection. The new rules affecting allocation of costs for research, the impact on the fixed income market, the prohibition on payments to financial advisers and the new significantly more onerous reporting requirements are all major issues for the industry players to deal with. One commentator has estimated that MiFID II will cost the financial services industry more than EUR 2.5 billion to implement. And smaller players will be hit hardest, having less ability to absorb these hefty costs.

As for the UK’s proposed exit from the EU (the UK has yet to formally pull that trigger) we can expect the UK’s financial services industry to be significantly impacted. However, quite what that impact will be is as yet unknown and will depend on what model is eventually negotiated for the relationship between the UK and the EU in place of the UK’s current position as a full member of the EU. Of particular relevance for asset managers will be what the UK’s access to EU markets will look like. Currently, asset managers along with other UK authorised firms have full access to EU markets under passporting rights, which allow them to carry on business in another EEA state whether or not through a branch.

There are difficult decisions to be made against an uncertain background. Some may need to establish subsidiaries in the EU – these will acquire EU passporting rights but for some the capital requirements may make this a costly exercise. Again, the biggest players are likely to have more flexibility to adjust to the new paradigm.

Of course, EEA firms currently operating in the UK under the EU passport face similar issues.

The general consensus is that the UK’s exit from the EU will not see major changes to UK financial services legislation deriving from the EU. One reason for this is the cost already incurred by the financial services industry in meeting the requirements of the legislation, particularly the more recent legislation.

So we come back to cost. It also seems unlikely that financial services regulation in the UK will change materially in order to avoid UK authorised firms having to comply with yet more and possibly conflicting regulations. However, recent experience in relation to the regulation of derivatives (see the EU’s EMIR and the US’s Dodd-Frank) shows this is not a foregone conclusion.
Amidst all this uncertainty it is apparent that there will be winners and losers, and it is only gradually becoming clearer ‘how the land lies’.