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Ed Lopez, SunGard

One size regulation does not fit all boutique asset managers

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When it comes to the effects of ‘one-size-fits-all’-regulation for boutique asset managers, off the peg doesn’t suit everyone. The very nature of regulation has changed. It’s grown, become global, and moved from being a check box exercise to being the rigid harness that restricts the movements of financial firms, says Ed Lopez (pictured), executive vice president, SunGard’s Asset Management business…

With that said, no one would seriously argue for a return to laissez-faire regulation and governance. And the newly empowered regulators are proving that a new broom sweeps clean with firms frequently being investigated and fined from for transgressions ranging from Libor rigging to forex benchmark manipulation.   
 
Yet there’s evidence that not all’s well, and that the regulatory net may be woven too tightly. For every whale caught, a ton of smaller asset managers are unintentionally caught in a net and left out of their element. What I mean by this is the effect of this regulation on smaller firms, such as start-up hedge funds, independent asset managers and regional wealth managers can leave them struggling to survive.
 
As the laundry list of things asset managers need to do to remain compliant has grown, so have the benefits of scale. Small or medium-sized asset managers, which are often independent from big financial institutions, are run and owned by their managers and are finding it much harder to absorb regulatory costs than the big boys.
 
A recent survey we conducted with analyst firm TABB Group of over 200 global boutique asset managers echoes this. It found that 65% of boutique asset managers feel that size and scale are important to succeed in today’s competitive market. However since the 2008 crash, regulations like AIFMD, Dodd Frank, EMIR, FATCA, MiFID Solvency II and the latest iteration of UCITS, have led to the institutionalisation of the asset management industry.  By this I mean the growing list of operational and organizational minimum requirements an asset manager must meet in order to attract assets.
 
So while banking giant HSBC announced this September that it would hire an additional 3,000 compliance officers, this still only brings the number of compliance staff to an estimated 2% of its global workforce. For boutique asset management firms the headcount implications and associated costs are far more significant in comparison and something.
 
But the cost of compliance is also felt by more established entrepreneurial firms. While regulation is a skyscraper-high hurdle for fund managers looking to break free and set up their own firm, existing firms with one to ten employees feel the foremost effect is on their viability, as regulatory costs reduce their profitability, according to the aforementioned TABB Group and SunGard research. The report goes on to find that the more established players with 11 – 30 employees feel regulation hampers their ability to raise additional assets and also dampens the entrepreneurial spirit and culture that initially propelled them forward.
 
Many small firms are set up by entrepreneurs in bear markets – if regulators don’t review their ‘one-size-fits-all- approach’ soon, these small firms will miss their window of opportunity and won’t be around when the market picks up. The end results are less choice for investors and more systemic risk through a concentration in the asset management industry.
 
In the US regulators have just woken up to this fact, thanks to a new report by the Office of Financial Research, the US Treasury's financial research arm. The question is when will UK regulators take notice, and what steps will they take to make sure that London offers the right growth environment for the next Jupiter Fund Management or the next CQS – firms which were founded by entrepreneurial fund managers and have created almost 700 current jobs between them.
 
Increasing expenses related to regulatory compliance are now the one thing that boutiques realise could make or break them as we move into 2014. But is it right that while the ‘too big to fail’ continue to raise assets, independent, non-systemic risk posing firms end up being ‘too small to succeed’? 

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