The shopkeeper who owned the “licensed grocer” in the village where I grew up continued serving behind the counter well after Alzheimer’s started to impinge on his functioning.
The villagers commented that he had become vague about the precise amount of change owing to customers, but the (small) errors were always in his favour. There was no implication that he was doing it deliberately, rather that his subconscious somehow stepped in to make sure he did not give money away.
Just so, the thematic review of best execution released last month by the UK’s Financial Conduct Authority found that many financial firms obliged to deliver best execution have failed to grasp the principle properly, or decided it does not apply to part of their business. Many assumed market discipline was sufficient – if their clients were still using their services, they must be offering best execution or the clients would have gone elsewhere.
The regulator puts them right about this, saying this reliance on customers, such as asset managers, shopping around was not enough.
Although asset managers might resent the implication that they are hapless innocents, incapable of looking after themselves in the scary world of securities trading, it is not an entirely baseless view of the industry.
Asset management is Cinderella to the banking industry’s Ugly Sisters – where banks can pour money into lobbying the source of regulation, asset managers rely on smaller, less well-funded groups to do that work.
But just as Cinderella does not do too badly in the end, asset managers frequently benefit from regulation, even if they are slow to see it and often fight its implementation.
A good example is Ucits, the European collective-investment vehicle. It has become a global brand, with investors relying on its regulatory stability from China to Peru.
Many market commentators believe the much-maligned Alternative Investment Fund Managers Directive could end up having a similar impact, possibly making the European hedge fund industry less exciting, but much bigger and more broadly appealing by promising investors that they are not giving their money to cowboys (or Bernard Madoff).
This Pollyanna view is unlikely to go down well among asset managers, but they might do well to accept that waves of regulation are happening and look on the bright side.
The new regulatory landscape holds significant business opportunities, at least according to consultancy PwC’s asset management practice.
Initiatives such as the UK’s Retail Distribution Review and the Europe-wide Markets in Financial Instruments Directive are intended to bring greater transparency to the market, which should mean products become more commoditised, leading to more trust in the industry, according to PwC. For an industry that has rightly spent the past few years soul-searching about how to win back trust, that should be no small thing.
Better regulation of alternative investments should mean institutional investors become more comfortable with adding them to portfolios, while greater emphasis on high standards in the back office could mean more investment boutiques outsourcing those functions to concentrate on their core operations. That could be seen as a win for everyone, as jobs are created in outsourcing companies, the boring work is done better and investment managers get to focus on what they do best.
They could also look around at the business opportunities created by regulation in other financial services sectors. A number of wealth managers have confided that clients are asking them to make allocations specifically to the category of “activities no longer done by banks”, and where rich individuals lead the way, mainstream asset management usually follows.
Asset managers feeling overwhelmed by regulation coming at them would do well to stand back and take a broader view, to make the best of the inevitable.
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