New rules aimed at ensuring U.K. money managers act in the best interests of their investor clients are credit negative for active managers, warns Moody's Investors Service.
In a sector comment Monday, Moody's addressed the impact of the Financial Conduct Authority's new rules, published April 5. Money managers will have to prove they provide value for money and also face increased transparency requirements.
"Although the new rules enhance transparency and protection for investors, active asset managers' operating and compliance costs will increase and their fees will decline, reducing profit margins and accelerating the shift toward passive investment management, a credit negative," said the Moody's comment.
The note highlighted that active managers are already facing increased operating and compliance costs from local and global regulatory initiatives, such as the Markets in Financial Instruments Directive II. These managers "will have to overhaul their cost structures and product lineup or merge to offset the pressure on revenue and generate economies of scale," said Moody's.
The new, additional rules on delivering value to investors "will reduce the fees charged by active managers that will have to adapt their business models and product offerings to an even more competitive pricing environment." The ratings agency added that money managers that provide the best value for money proposition "likely will consolidate their market share," as bigger players "with solid governance standards and diverse solutions in both active and passive management such as FIL Ltd. (Fidelity International) and BlackRock (BLK) Inc. (BLK), will be best positioned to absorb the additional regulatory pressures."