Streamline regulations for fund managers to avoid potential 'mass departure' from the sector
New Fund Management Businesses Face Regulatory Hurdles in the UK, Warn Experts
There are concerns that the UK government may face an exodus of fund managers if it does not ease the regulatory barriers that have impeded new entrants to the industry. A report from Peel Hunt, Hill Dickinson, and IIMI suggests that the high barriers to entry have caused a decline in the creation of new fund management businesses.
In recent years, the number of fund management companies authorized by the Financial Conduct Authority (FCA) has dropped significantly. While the number of fund managers in other jurisdictions like Luxembourg and the US has increased, only 32 fund management companies were authorized by the FCA in 2022, compared to over 200 in 2016.
The report argues that the market has lost its energy due to low availability of smaller funds and the high threshold of large allocation requirements. The complex and costly regulatory framework for Alternative Investment Fund Managers (AIFMs) has emerged as a significant deterrent for new entrants.
Charles Hall, head of research at Peel Hunt and co-author of the report, stated, "The harder you make it, the less likely it is that anyone's going to bother." He went on to explain that aspiring entrepreneurs find the regulatory hurdles unappealing due to their size.
The report recommends the creation of a new regulatory framework that would expedite the authorization process while exempting smaller funds from many of the regulatory requirements applicable to their larger competitors until their portfolio reaches the minimum size. The proposed framework aims to foster growth by easing the regulatory burdens on new fund management businesses.
The report on fund managers comes amid calls for UK regulators to adopt a more pro-growth outlook. FCA boss Nikhil Rathi has expressed a willingness to collaborate with the Treasury to support businesses' development, and IIMI CEO Dani Hristova stated that the FCA has been eager to engage with practitioners to address the challenges and barriers to growth faced by these types of firms.
Potential reforms include a review of the regulatory framework for AIFMs, finalized rules allowing fund managers to jointly pay for investment and execution services, and a more streamlined and nuanced approach to regulation for AIFMs to reduce compliance costs and boost growth.
These proposals illustrate a shift towards a more pro-growth regulatory environment, aiming to make the UK more attractive to new fund management businesses while maintaining necessary protections.
Investors might be dissuaded from entering the finance industry in the UK due to the complex and costly regulatory framework for Alternative Investment Fund Managers (AIFMs), which hinders the creation of new fund management businesses. The report suggests that a more pro-growth regulatory environment is needed, including a revised AIFM regulatory framework, to foster growth by easing regulatory burdens on new fund management businesses and making the UK a more appealing destination for investing.
