UK/EC - Fund manager profits will be decimated by EC plans to make them increase their capital reserves, Mercer Oliver Wyman claims.
The firm – a sister company to Mercer Investment Consulting – claims the EC’s directive will force asset managers to hold “significantly more capital” to cover operational risks.
This, it says, will reduce profitability and could force companies to sell their fund management arms.
The controversial proposals are designed to strengthen the financial sector.
But Mercer says the average European asset manager will have to divert 10% of its profits over the next three years to shore up its balance sheet to comply with the EC directive. Until now, fund managers have operated with “very little” capital reserves.
The consultant said: “As asset management operations of financial institutions require more capital, this means that their parent companies, such as major banks, will have to take an implied return-on-equity hit and may therefore reassess the attractiveness of the business.
“Dedicated asset managers falling under the CAD3 directive and who do not form part of a larger banking group, may in some cases choose to relocate outside the European Union or need to embark on rebuilding their balance sheet.”
Watson Wyatt partner Keith Jecks believes the directive could stunt the growth in the number of specialist managers.
He said: “The barriers for entry into the business will be higher, and the implication of this is that there will be fewer boutiques. The directive will increase the barriers to new firms and the expenses of existing ones.”
The Investment Management Association’s regulation and tax director, Julie Patterson, agreed.
She said the proposals had come at the “worst time possible” for fund managers.
But while the industry does expect some consolidation, “there ought to be a natural move in the market, rather than it being forced by regulation”.
The consultation period for the EC directive ends in October. It is due to come into force next year.
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