Main Interview Findings
We interviewed 30 senior figures from 20 IMA member firms and asked them a range of questions about the current regulatory environment.
There is no kneejerk opposition among IMA members to any form of enhanced regulation, and there was broad acceptance that action needed to be taken to seek a more stable banking system.
However, interview findings this year reflected several underlying concerns, the first of which was that reforms directed at improving financial stability would harm investment returns for clients.
Another worry was that the sheer volume of new regulation currently being introduced or in the pipeline would mean there would be inadequate analysis of the likely consequences, with the result that the desired outcomes were not achieved.
There is considerable uncertainty in three main areas: the implications of a lack of coordination internationally, the need for appropriate focus and the risk of unintended consequences.
Geography of Regulation
While many regulatory measures are still under discussion, and years away from full implementation, it is clear that a new geography of regulation is emerging. This has three broad dimensions:
- Strengthened global institutions for cooperation
- A significant increase in powers of European supervisory bodies
- A restructuring of domestic regulatory architecture.
Global Regulatory Environment
- Despite greater global coordination, asset managers see increasing fragmentation marked by creeping extra-territoriality and protectionism
- Concern about increased cost and complexity through heterogeneous application of rules across jurisdictions
“It’s not the logistics of dealing with so many regulators, but the fact that some regulators are trying to export their own regulation. Regulatory imperialism has no benefit whatsoever.”
European Powers
- Broad support for Single Market; questions over increased powers of European Supervisory Authorities (ESAs)
- Concerns over politicisation and insufficient regard for UK business models
- Risk of time and resource constraints undermining ESA policymaking
“In principle, harmonisation should be a good thing. The danger is when it becomes politicised and other factors creep into the process; that’s when it becomes problematic. And certainly the track-record on harmonisation isn’t good.”
UK Regulatory Environment
- Appreciation of need for increased scrutiny; lack of confidence in appropriate targeting of risk monitoring processes (eg. ICAAP)
- Desire for improved relationship with regulator; transition to FCA seen as important step in this direction
- Call for UK not to lose sight of need to promote attractiveness of UK financial services industry
“A lot of the reporting requests we get are certainly intrusive but they also strike us as naïve; we don’t really know what Luxembourg or the FSA are going to do with all this data, and it’s not the data that we would have collected to answer the questions that we think they’re asking.”
Prudential Reform of Banking Sector
While in agreement over the need for banking reform, firms raised questions over who would carry the associated cost, as well as the difficulty in gauging whether the reforms would achieve the desired outcomes:
Role of Banks
- Broad expectation of investment banks spinning off proprietary trading desks
- Potential consequences for asset managers in increased competition and wider talent pool
- Mixed views on the impact of bank reform for market liquidity; some firms relatively sanguine, others worried
“It’s a difficult situation we find ourselves in. The pendulum is swinging too far the other way. Everything has changed in the banking environment and there are massive ramifications. It affects the way we invest, the way we use banking services, and the way we assess counterparty risk.”
Alternatives to bank finance
- Expected changes in banking industry raising questions over possibility of asset managers stepping into banking space
- Potential avenues including liquidity provision and credit intermediation
- Apart from minority of large players, asset managers reluctant about greater involvement in non-bank market finance
“As banks seem less capable of providing loans, corporates have to rely more on the markets, and then there’s the question of whether they can remain the originators of bond issues if they’re not investors or providers of liquidity, or whether the market should start organising itself outside of the banks.”
Pension Landscape
As pension funds are increasingly diversifying away from equities, firms are contemplating the impact of changing regulatory requirements on asset allocation as well as the role of Government and regulators in UK pension provision:
Operating Environment and Client Needs
- Potential of further opportunity for development of tailored products
- Questions raised over long-term future of equity investment among UK pension funds
- Concerns that regulatory action may prove pro-cyclical and damaging both to clients and wider markets
"As a product of risk-based solvency, we have seen people being driven towards ‘safer’ assets such as sovereign triple-A rated bonds, which are at a 100-year high, when the golden rule of investment is to buy low. Furthermore, while bonds are seen as a very stable asset class, across cycles they are very volatile. The technical way in which solvency requirements are put together for banks and insurance companies, is having profoundly disturbing consequences, and is adding to the volatility of financial markets."
Outlook for UK institutional market
- DC provision can deliver, but requires greater support for individual members
- Stable pension framework underpinned by political consensus seen as key in this respect
- Greater member engagement necessary, especially regarding investment communication
"The most important thing is not to meddle; get the system up and running, create a stable framework and then leave it alone rather than have everybody coming up with the next best mousetrap every year."