Looking towards 2019: Key events to shape the European funds industry______

As a new year begins, Calastone’s Henning Swabey looks at some of the pivotal issues which are shaping asset management businesses in Europe. 2019 will see the funds industry in Europe face some of its greatest challenges yet, namely the expanding impact and evolution of regulations and the potential repercussions of Brexit. Unpredictable market movements may also endure and impede returns, prompting asset managers to implement cost cutting measures, although a number of larger fund management businesses are voting to merge with their competition in order to generate savings and create business synergies. Regulation divides the market The funds industry in Europe has been swamped with a flurry of post-crisis regulations. A study we undertook with Funds Europe – “The Impact of Technology and Regulation on Funds”  found 72% of respondents acknowledged a negative side-effect of regulatory compliance had been a rise in underinvestment in other parts of their businesses. Interestingly 66% of respondents said their priority investment area would have been technology if budgets had not been so constrained by compliance costs. It is therefore more important than ever that fund businesses look for efficiencies and cost savings wherever they can, if they are to stay technologically capable and competitive. Of all the regulations introduced since 2008, MiFID II continues to pose the most challenges. Despite MiFID II’s transparency benefits, it has generated huge costs for the European funds industry. Our study found MiFID II – more than any other single piece of regulation created the most work - by a significant margin - for market participants, with 64% stating the rules were very resource intensive. In contrast, the General Data Protection Regulation (GDPR) and UCITS V lagged well-behind in terms of their overall impact on firm-wide resources. To cap it off, 93% of market participants added the amount of effort required to comply with new regulation had increased over the last year. Furthermore, having discussed MiFID II and its cost transparency measures with clients and partners on the continent, there seems to be a belief that as investors start to understand the true costs of working with one bank or platform versus another they will start to consider more carefully who they work with. If so, this will further increase the operational and reputational pressures involved in managing portfolio transfers. Brexit and its impact on European asset managers Regulation is not the only impediment facing the funds industry, with a number of geopolitical risks looming, most notably Brexit. An agreement on the UK’s future relationship with the EU has been approved in principle although in reality a Hard Brexit remains a real possibility amid the political backlash in the UK against the contents of the final text. A parliamentary vote on the agreement is expected to happen in mid-January, and its smooth passage is far from assured. While a transitional arrangement is the preferred outcome for European asset managers, the Financial Conduct Authority (FCA) confirmed in October 2018 that it will enact a temporary permissions regime (TPR) for European Economic Area (EEA) firms looking to distribute inside the UK in the event of a no deal. As a result, the impact of Brexit on EEA fund managers currently marketing products into the UK is likely to be fairly trivial. Consolidation is in the air at asset managers Experts believe that M&A (mergers & acquisitions) across the funds industry could be an attractive strategy to preserve growth by generating savings and achieving scalability firms need. A study by PwC in March 2018 found that 43% of CEOs at asset and wealth managers were actively planning for M&A (1). Activity has certainly spiked with 18 money manager deals recorded as of May 2018 involving approximately $265.6 billion in assets. (2) However, M&A will only pay dividends for managers if they consolidate their systems effectively, eliminate duplication and create an environment ripe for operational efficiencies. Those firms that are not planning to merge with their rivals need to strip out archaic manual processes and technologies and pursue a path of digitisation and operational streamlining in order to help retain their competitiveness. Take transactional costs in distribution, for example. Our analysis shows that the global frictional costs of trading could be reduced by as much as £3.4 billion per year if the industry were to move to our blockchain-enabled Distributed Market Infrastructure (DMI). What lies in store for the funds industry this year? The funds industry is clearly under a lot of pressure, and some of the challenges we saw last year do not show any signs of abating. The industry must continue to look for efficiencies in as many places as it can so that costs can be kept low, investor experiences improved and competitiveness is retained. This is why we are migrating our entire global client base of over 1,700 financial organisations to the DMI in May. In leveraging this new technology that digitises the trading, settlement and distribution of funds, all market participants will have the tools to innovate, grow and differentiate. We are already working with a number of leading financial organisations that recognise the capability that the DMI can offer. Anyone wishing to work with us and become actively involved with the DMI during the transition please either contact myself or your relationship manager. The DMI has the power to provide the transformation the industry needs, and I look forward to working with you all during this exciting new chapter.

  1. PwC (March 13, 2018) Asset and wealth management CEOs very optimistic about growth but aware of looming disruption
  2. Pension & Investments (July 11, 2018) 2018 money manager M&A: Asset gathering or corporate synergies