How the upside of regulation could make fund managers richer

Michael Bow
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Red tape is rightly held up as a barrier to growth – but what if regulation could be a springboard for greater profits in the same way M&A can be?

That is the slightly counter intuitive question consultants at McKinsey have asked themselves about the fund management sector – and their answer suggests some regulations can be good for profits.

A new research paper by the company suggests that fund managers could use one piece of regulation to their advantage to boost profits by at least 15 per cent.

The snappily titled undertakings for the collective investment in transferable securities part IV, which came into force three years ago, and was designed to put the sales of funds to people across Europe on a level playing field.

It also introduced a passport system, allowing fund managers based in one country to freely manage funds in another – opening the door for greater centralisation of functions.

McKinsey has crunched the numbers and found about €1bn of cost savings are still on offer in the sector by increasing consolidation of functions in a fund management business.

The biggest chunk of this – about €600m – could come from consolidating operation and support functions. This graphic, by McKinsey, shows the extent of the opportunity.

It shows that €6.7bn is spent by European asset managers, about 40 per cent of the industry’s costs, on support functions like back office and IT and support, far outstripping cash spent on marketing (€3.9bn) and fund management itself (€6.2bn).

The consultancy says that centralising operations could cut costs by 15 per cent and save €600m across Europe. A further €200m of savings on offer from consolidating legal functions.

Fund managers are currently facing up to more than 50 piece of regulation across the world. Many could be damaging to the sector, but as McKinsey’s work shows, not all regulations can stifle growth.