As a new year begins, Calastone’s Steve Leggett looks at some of the pivotal issues which are shaping asset management businesses in the UK.
2019 will see the funds industry in the UK face some of its greatest challenges yet, namely the potential repercussions of Brexit, as well as the expanding impact and evolution of regulations. 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.
Brexit nearing its conclusion…or is it?
An agreement on the UK’s future relationship with the EU has been approved in principle, although a hard Brexit remains a real possibility amid the domestic political backlash against the final text’s contents. A parliamentary vote on the agreement is expected to happen in mid-January, and its smooth passage is far from assured. Assuming an implementation period happens, UK managers can continue distributing their funds cross-border inside the EU until the end of 2020. If the deal collapses, UK UCITS and alternative investment funds could be designated as third country managers from March 2019, and subject to the national private placement regimes of each member state should they want to access EU investors.
UK investor concern is mounting amid all of the uncertainty, with confidence falling to its lowest point in two years in the last quarter of 2018, according to our recently launched Fund Flow Index (FFI), a monthly benchmark which tracks order flows representing millions of allocators. In December the index fell to 50.1, its lowest reading since October 2016, as net inflows to UK-domiciled funds dropped to just £39.8m, only a little over one hundredth of the average inflow each month over the last two years.
Regulation divides the market
In addition to geopolitical challenges, regulatory change continues to have a growing impact on the industry. 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.
Despite being introduced a year ago, MiFID II continues to pose a challenge to the funds industry. While MiFID II has been applauded for enabling the funds world to become more transparent about costs and charges, it has come at significant expense to the industry and will continue to do so, according to our research. The Calastone/Funds Europe study found that MiFID II – more than any other single piece of regulation – created the most work for the funds industry.
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 the savings and 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 digitalisation 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 creating this new platform that digitalises 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.
- PwC (March 13, 2018) Asset and wealth management CEOs very optimistic about growth but aware of looming disruption
- Pension & Investments (July 11, 2018) 2018 money manager M&A: Asset gathering or corporate synergies