Moody’s warns FCA rule changes will be credit negative for the £8 trillion asset management industry

Ratings agency Moody’s has warned that new asset management rules announced by the Financial Conduct Authority (FCA) last week will be credit negative for the £8 trillion industry.

Moody’s analyst Tiziano Oliva wrote in a note that though the reforms will increase transparency and protection for investors, “active asset managers’ operating and compliance costs will increase and their fees will decline”.

He added this would reduce profit margins and accelerate the shift towards passive investment management, which would in turn be credit negative for active firms.

Read more: Gina Miller critical of City watchdog’s new rules to shake up the asset management industry

Active fund managers charge higher fees for customised stockpicking, whereas passive fund managers charge a relatively negligible fee for simply tracking an index.

The FCA’s measures, announced last week, involve ordering fund managers to annually assess the value for money that they are providing to investors.

Along with new massive regulatory change such as the second Markets in Financial Instruments Directive (Mifid II), which Moody’s also said was credit negative, the rule changes mean that asset managers “will have to overhaul their cost structures and product lineup or merge to offset the pressure on revenue and generate economies of scale”, according to Oliva.

A number of industry players have already merged, such as Aberdeen Asset Management and Standard Life and Janus Capital Group and Henderson Group. Rathbones confirmed today it was in talks with Speirs & Jeffery, after calling off a merger with Smith & Williamson last year.

Last week Cleveland & Co, a boutique legal adviser to the investment management industry, said the FCA’s changes could prevent new entrants from launching businesses in the industry due to the increased costs they will now incur.

Read more: In demand: Another wealth manager made a move for Smith & Williamson after its Rathbones merger talks emerged