For a global business such regional variations can present challenges. Sometimes these differences are mere annoyances. But at other times, they become more serious. For global asset managers these differentials are particularly acute.
Formica says: “Janus Henderson straddles the Securities and Exchange Commission, the Financial Conduct Authority and the European Securities and Markets Authority, making it possible to see the challenges in real time.”
Asset managers feel caught between two contradictory trends. Formica says: “Our clients are becoming more global while the regulatory environment is becoming more local.”
Tuffy agrees: “Both asset managers and institutional investors operate globally making it more likely that local legislation will have repercussions.”
The introduction of The Markets in Financial Instruments Directive II is creating particular problems for asset managers. Formica says: “This is fundamentally at odds with the processes and practices in the US making it difficult for us to develop a global policy.”
Under MiFID II, asset managers will need to separate out the costs of investment research. Formica says: “The trend is for managers to absorb the cost of research rather than use the research payment agreements.”
As the bulk of asset managers have decided to pursue this route, it would be difficult for a manager to buck this trend. Formica says: “It also reflects the difficulty in implementing the MiFID II regime if managers choose not to follow this route.”
But these rules apply to investment managers who are based in Europe. Formica says: “For a global company with investment managers based in the US, it is impossible to pay hard investment costs.”
At the moment the only way for an investment bank to be able to charge hard rather than soft commission fees in the US would be to change their licence from a broker-dealer to an investment adviser.
Formica says: “This would fundamentally change their business model including the regulatory environment and there would be some aspects of business they could not perform.”
Under the current proposed regime, a European-based fund manager would not be able to receive research from a US-investment bank as they are not allowed to accept hard payments. Formica says: “This makes our world smaller.”
This is not the only conundrum facing investment managers. Formica says: “While our US-based fund managers can pay for and receive that research, it would then be difficult to share this with their European colleagues.”
That’s because sharing research across different jurisdictions would be viewed as a cross-subsidy or an inducement. Formica says: “There is a conflict between the US client which has paid for the research and the European client receiving it free of charge.” Formica says: “This mismatch in legislation would prevent the collaboration that is at the heart of successful investment. That’s just crazy.” Regulation is effectively hindering fund managers from effectively servicing their clients, he adds.
Sebastian Reger, partner at Sackers, says: “The unintended consequence of these regulatory differences is it creates operational and administration problems for firms.”
Not only will MiFID II make it harder for fund managers to do a good job for their clients but it will fundamentally change the investment research market. Formica says: “It will shift the way that investment research is priced and provided.”
