Regulatory reform in Europe is likely to enhance competition and drive up costs in the asset management sector, which may ultimately drive further consolidation, according to a report published Monday from Moody’s Investor Service.

The European Union’s second Markets in Financial Instruments Directive, more commonly known as MiFID II, is credit negative for Europe’s asset management industry as it will accentuate the move to cheaper passive funds, the report says.

For example, the tougher cost and compensation disclosure requirements in MiFID II should make it easier for investors, independent financial advisors, and others, to compare investment products. “This improved cost transparency, as well as a ban on commission paid to financial advisors, will push down industry fees, intensify the move to passive and put industry profits under pressure,” Moody’s says in a new release.

Additionally, new product governance and suitability rules will “reinforce the trend to outcome-oriented investing,” and will increase industry compliance and research costs. “The resulting squeeze in margins will drive consolidation among smaller players as they seek scale to help absorb these costs,” Moody’s says.

“The introduction of MiFID II will put pressure on asset managers’ profits by lowering their effective fee rate and increasing their costs. However, cost saving initiatives, new investment solutions and M&A will likely offset some of the negative effects, limiting their credit impact,” says Marina Cremonese, vice president and senior analyst at Moody’s, in a statement.