The wave of new financial services regulations is causing deep changes in the asset management industry, heralding a period of transformation that will threaten some business models’ profitability. Higher regulatory costs in the US and Europe are squeezing asset managers’ profit margins, just as regulation also forces them to review some of the fundamental ways in which they operate. But the effects of regulation aren’t all disruptive – new opportunities await those asset managers that adapt most adroitly.
With the huge and detailed task of complying with the new regulations keeping asset managers fully occupied, many have yet to look into the accompanying strategic challenges. Yet in an industry where regulation is changing the game, doing so is essential.
Asset managers need to analyse how new regulations will affect their businesses – the effects may range across their organisational structures, cultures, capital requirements, product development, investment strategies, marketing and distribution. They need to think about how to adapt in order to grow profitably in a world where some business models might become outdated; where regulatory risk is rising; yet where financial regulation is leading to opportunities to launch new investment products and to access new markets.
Some parts of the industry have to tackle considerable challenges. For example, how will medium-sized and small asset managers find the scale to absorb regulatory costs? And, how will future proposals for regulation of ‘shadow banking’ affect money market funds and securities lending? Asset managers and their service providers need to understand how new regulations – some of which have yet to be defined – are shifting the foundations of their industry, how this will impact their business models and where their new opportunities lie.
Below are what, we believe, the main impacts of regulation will be:
The array of new regulations is creating huge change already – which is likely to increase still further as regulators introduce yet more rules to safeguard the financial system. Most notably, many asset managers face mounting IT and people costs as they prepare for testing compliance regimes. Others are beginning to look into strategic issues such as their organisational structures.
As asset managers move beyond the task of compliance to address strategic issues, they’ll need to adapt strategy more dynamically than ever before. Learning from the experience of banks, asset managers will need to embed approaches to identifying, analysing and preparing for regulatory change, making sure new practices become part of a new business as usual. As part of this, they will have to analyse the strategic implications of new regulations.
Given the increased importance of scale and brand, asset managers may be able to learn from other industries where these factors matter. Generally speaking, asset managers’ success will depend more on factors such as maintaining a strong infrastructure to support regulatory, investor and marketplace expectations. The quickest to adapt to the effects of regulation will be best able to avoid damage from the effects of regulation, and to exploit their opportunities.
Further articles will be published in due course providing more insight around each of these topics, but in the meantime, if you would like to discuss any of the issues raised here in greater deteail, please get in touch with your usual PwC contact, or any of the authors listed above.