A punitive regulatory culture and high financial penalties make the United Kingdom the riskiest country for asset management firms, outside of China, according to a poll.
Asset managers surveyed by international law firm Ropes & Gray rated the U.K. second only to China as the riskiest market in which to do business. The report was based on responses from 300 senior-level executives at multi-national businesses globally across fund management, private equity, banking, and non-financial sectors. Of those asset managers interviewed, 19 percent thought the U.K. was the market that poses the “most significant risk” to their businesses, with 38 percent saying China represented the highest risk.
A chief risk officer of a European financial services group surveyed for the report the report cited high risks and penalties for compliance failures.
“To avoid problems with regulators, we must be absolutely sure all our assets and investments are compliant,” he said.
Private equity houses responded similarly, with 14 percent claiming that the U.K. was the market that currently poses the most significant risk.
The potential negative influence of new regulations has been recognized by the U.K. financial regulator, the Financial Conduct Authority. In a speech on Thursday, Megan Butler, director of supervision at the FCA, said that the best investment managers may be “put off of operating in the U.K. by avoidable barriers to entry.”
“We know prospective entrants to the asset management industry would welcome more support from the FCA,” she said. “We receive a lot of applications each year for authorization from asset managers.”
Butler said that some of these businesses struggle to navigate regulation, demonstrated by the fact that the FCA’s contact center receives up to 1,200 pre- and post-application calls a month from investment managers “seeking clarification on issues ranging from authorization, to regulation and reporting.”
While these issues weren’t necessarily “a big surprise,” Butler said it was important for the FCA that the best investment managers aren’t discouraged from operating in the U.K because of the complexities of regulation.
[II Deep Dive: U.K. Fund Firms Seek Clarity from Regulator on Brexit]
Amanda Raad, a partner at Ropes & Gray, said the volume of changes to the regulatory rulebook was behind growing investor concerns.
“There has been such a dramatic change in the regulatory and enforcement landscape of the U.K. – just as there has been in China – over recent years that investors must quickly adapt,” she said. “Added to this mix is Brexit, which is only adding to the uncertainty.”
The uncertainty from the ongoing Brexit negotiations was captured earlier in the week by Schroders’ senior European economist, Azad Zangana, who criticized prime minister Theresa May’s speech in Florence, saying it “lacked many of the concrete details that the European Commission is desperate for.”
In today’s speech, the FCA’s Butler said that there was “no good reason” for European regulators to complicate the rules that govern the U.K.’s asset management industry after Brexit. Her statement followed a series of reports that the European Securities and Markets Authority would seek to strengthen its regulatory powers across the EU.
