The new regulatory structure will result in investment banks being paid less for its research. Formica says: “Investment banks are likely to cut their company coverage significantly.”
Research into small and medium companies is likely to bear the brunt of these cuts – banks will deem it more important to focus on companies with a large market capitalisation as there is greater stock turnover in these firms.
Formica says: “The cost of raising new debt or equity for these firms will increase as investors will be less aware of these companies.”
There are other factors that can further diminish harmonisation. Henderson says: “Often regulators respond to very local concerns.”
The enforcement of new regulation is frequently driven by a political response to recent events. Henderson says: “A jurisdiction will still be implementing the overall G20 principles but there will be a drive to clamp down harder on parts of the industry in response to a particular scandal.”
In addition, many regulators effectively compete against one another to set the gold standard in a particular area of financial regulation. Henderson says: “That desire has to be balanced against a reduced regulatory burden benefitting the local economy.”
There is a danger that a local regulator could become disconnected from their local market conditions. Henderson says: “The regulator needs to ensure it has enough expertise in order to pursue this strategy.”
One such example of regulation driven by local market conditions is the senior management regime introduced by the FCA. It has already been introduced in the banking and insurance sectors and the regulator wants to extend into asset management.
The regime requires firms to set out how the business operates and who is responsible for each activity. Formica says: “That places greater personal responsibility on individuals.”
No other jurisdiction is implementing a similar program. Formica says: “This could prevent UK asset management firms from hiring the best global talent as this regime increases your own personal liability.” The regulator would argue that as long as an employee sticks to the rules, this will have impact.
Formica says: “But a recent Citywire article showed the personal enforcement notices in the banking and insurance sector had increased by 170% while company notices have remained static over the same period.” But while the current situation is frustrating for global asset managers, they should take solace from how similar dislocations have been resolved in the past.
Tuffy says: “The introduction of the Volcker Rule in the US had repercussions in Europe because of its global impact.” Regulators were, however, able to come to agreement on how these rules could be softened in order to ensure there was not market disruption, says Tuffy.
The introduction of derivative collateralisation is another good example. It necessitated regulators in the US and the EU granting each other equivalence around central counterparty clearing houses. Tuffy says: “Both parties were able to find an agreement that did not Balkanise the derivatives markets.” While it seems this stage has not yet been reached with MiFID II given the imminence of their introduction, asset managers and investors should be encouraged by the appointment of the new chairman of the Commodities Futures Trading Commission.
Tuffy says: “J. Christopher Giancarlo has talked about the need for local regulations to take primacy while also allowing for global principal harmonisation.”
Many asset managers hoped regulators would have reached such an agreement sooner. But the new White House administration has resulted in a complete turnover of staff at the SEC and the CFTC. Tuffy says: “That has slowed down international co-operation.”
Formica says: “We’re hopeful that there will be either a change in the rules or a construct agreed between the two regulators which would allow us to avoid these challenges.”
A resolution of this issue will is likely to be driven by both international regulators discussing the issues further along with firms actively lobbying them. Tuffy says: “During this period of re-regulation after the financial crisis, there have been a number of these inflexion points. Unfortunately it seems to be a function of global policy makers that resolution of these issues happens later in the day.”
But asset managers and institutional investors should be realistic about what level of harmonisation can be achieved. Gogna says: “It’s going to be hard to achieve because the world is made up of different jurisdictions, cultures and accounting regulations.”
