Our Insights

The rewards of regulatory investment

Investor trust in compliance could become a market differentiator for asset managers

Managing regulatory change requires asset managers to deploy significant resources in areas such as training, legal reviews, as well as IT system infrastructure in order to ensure compliance.

The growth of European Union (EU) regulations governing the operations of asset management activities has been unparalleled, but rather than treating compliance as merely a sunk cost asset managers can leverage that investment as a tool for enhancing operating models and risk management to improve client relationships and ensure long-term retention.

Striving for excellence in regulatory compliance may be a key market differentiator

Striving for excellence in regulatory compliance may be a key market differentiator for investors looking for further assurance that their assets are adequately managed and safeguarded.

The cost of compliance

A precise view of the cost of regulation is difficult to calculate but an analysis conducted by Europe Economics1 after the financial crisis estimates that the combination of direct and indirect initial one-off EU compliance costs was 1.43  percent of operating expenses for asset managers. In addition to this, there was an annual recurring cost of up to 0.29 percent of operating expenses.

At the time, those costs were largely attributed to managing the requirements resulting from the Capital Requirements Directives (CRDs), the Market in Financial Instruments Directive (MiFID I) and the third Anti-Money Laundering Directive (MLD3).

Since then, regulation has expanded to include more complex requirements under the Alternative Investment Fund Manager Directive (AIFMD), UCITS V, the European Market Infrastructure Regulation (EMIR) and MiFID II. While the pace of new regulation may decrease as the initial measures introduced in response to the financial crisis come to an end, it is not expected to cease.

Realistically, asset managers and other financial institutions will continue to see new regulations that require both implementation and recurring costs to meet compliance standards.

Regulation is largely viewed as a compliance cost

Among market participants, regulation is largely viewed as a compliance cost. According to a financial institutions survey 2 by professional services firm EY, 38 percent of the institutions considered UCITS V as "a pure cost" with no "specific or significant benefit".

In reference to EMIR, 68 percent said it was "too expensive to implement compared to the advantages" provided. Half of the respondents viewed MiFID as "another layer of paper and administration" without benefit, and 52 percent shared the same opinion in regards to the Packaged Retail and Insurance-based Investment Products regime (PRIIPs).

Enhancing client relationships

From an investor relations perspective, however, regulations can offer substantial benefits as greater transparency, security and enhanced investor protection are especially valuable to prospective investors and existing clients. 

Security and enhanced investor protection are especially valuable to prospective investors and existing clients.

Demonstrating an understanding of and compliance with the evolving regulatory environment facilitates deeper dialogue and closer partnerships with investors as asset managers help their clients navigate through the various complexities.

Even though regulation requires significant investment from asset managers and will likely demand even more in the future, treating these efforts as purely the cost of doing business may result in overlooking opportunities to identify the benefits to investors and strengthen relationships with them.


Sources

  1. Europe Economics (January 5, 2009) - Study on the Cost of Compliance with Selected FSAP Measures
  2. Ernst & Young - EY (September 2014) - Survey on the cost of regulation and its impact on the Luxembourg financial marketplace