Efforts to stoke competition among asset managers in the United Kingdom are likely a burden for certain active managers, says Moody’s Investors Service.
The U.K. Financial Conduct Authority (FCA) published a series of new rules last week “requesting asset managers to act in the best interests of the investors in their funds,” the Moody’s report says.
The new rules won’t be fully in effect until September 2019.
Among other things, the rules will require asset managers to assess their funds’ value-for-money, and to take corrective action if it falls short of minimum requirements. The rules will also require firms to move investors to cheaper share classes of the same fund, and to enhance fund governance. The FCA has also proposed new cost and performance disclosure requirements.
FCA rules aim to deliver better protection for fund investors
Although the new rules will “enhance transparency and protection for investors”, the Moody’s report says, it warns that active asset managers will likely see their compliance costs increase, and revenues decline, “reducing profit margins and accelerating the shift toward passive investment management.”
Ultimately, active managers will likely have to “overhaul their cost structures and product lineup or merge to offset the pressure on revenue and generate economies of scale,” the report says.
The new rules will likely mean that the firms that provide the “best value-for-money proposition” will be able to consolidate their market share.
The report points to large players “with solid governance standards and diverse solutions in both active and passive management”, such as BlackRock, Inc., as the firms that are “best positioned to absorb the additional regulatory pressures.”