Money Managers' Sales in Europe Under Threat From New RulesBy
Distributors may be forced to work with fewer asset managers
Southern Europe likely to be most affected: Cerulli Associates
Asset managers face a new headache as rules aimed at making financial markets fairer and more transparent threaten their ability to sell investment funds into continental Europe.
The “more onerous” regulations may encourage the banks and insurers that distribute these products to limit the number of fund managers they deal with, according to Schroders Plc. Under the MiFID II rules, which come into force next January, financial companies will have to document transactions in far more detail, raising concerns about a chilling effect on sales.
“It’s simply because of the practicalities of it,” Sheila Nicoll, head of public policy at Schroders in London, said in an interview. Distributors may start to say, “rather than dealing with 25 product providers, we are only going to deal with five,” she added.
Europe became more lucrative for asset managers over the past decade as banks started to sell more third-party products. MiFID II challenges this revenue stream, not only because lenders might slim down their client lists but also because the rules could ban commissions for selling other firms’ products. Local rules already prohibit such financial inducements in the U.K.
Money managers’ business in southern Europe is likely to be worst affected because banks dominate distribution there, according to a report this month by Boston-based consultancy Cerulli Associates.
“Third-party sales volumes may not suffer a significant fall, but the managers will have to work harder as there will be fewer entry points for sales and smaller buy lists,” said Barbara Wall, Cerulli’s managing director for Europe.
The threat to European sales comes as active managers battle to protect market share from cheaper passive funds and manage rising regulatory costs, including an estimated $2.1 billion in technology expenses from MiFID II in 2017. One of their biggest concerns is how firms will pay for investment research in the years ahead.
Money managers are still waiting for more guidance from the European Securities and Markets Authority on how their relationship with distributors will be regulated under MiFID II. There’s a lot at stake: The continent’s investment-management industry oversees some 23 trillion euros ($25 trillion), according to the European Fund and Asset Management Association.
Distributors on the continent are already signaling that they’ll offer a narrower range of funds as a result of the rules, and being on their shortlists of preferred firms will be key for asset managers, said Nicoll of Schroders.
“What worried me is that the distributors would say, we’re not going to use external providers at all, we’re only going to use our own in-house products,” she said. “There is still some danger of that but it’s less acute now.”