Cost of compliance leading to uneven playing field on buy-side

Fixed income participants agree legislation has created a less competitive environment and led to the rise of the ‘defensive merger’ on the buy-side.

Several senior fixed income market participants have highlighted the cost of compliance has created a less competitive environment in the asset management industry.

Buy-side experts explained they have started to ‘defensively merge’ with one another, in a bid to fight off growing costs often seen through compliance technology and a squeeze on profits.

“This is something we will see more of moving forward and the larger powerhouses will have that bandwidth to cover costs of compliance. Smaller asset managers will need to be more creative when looking at how to comply with legislation,” said Carl James, global head of fixed income trading at Pictet Asset Management.

The burden of compliance has been particularly felt by smaller asset managers unable to keep up with the costs, according to Andrew Falco, head of fixed income trading at Fidelity International.

“The regulatory landscape has made the environment less competitive because if you can’t afford compliance costs being put in front of you, you could be driven out of the market place.

“Costs are definitely increasing and I look more like a compliance officer these days, signing reports and best execution files on a daily basis, but we are in a place at Fidelity where we have the means to do this. It makes how you engage with markets much more difficult for smaller asset managers,” Falco explained.

This year has seen several major buy-side mergers, including Standard Life Aberdeen, Janus Henderson and Amundi Pioneer. A squeeze on profits and rising costs are often cited as being reasons for mergers.

Paul Reynolds, fixed income product manager at TradingScreen, added larger houses also have more ability to build technology for compliance in-house, whereas smaller asset managers simply don’t have the resources.

He said: “Building in-house for some is not in scope these days due to the complexities around integration, connectivity and resources. That puts onus on vendors like us to keep developing these products to supply them to those who can’t build the technology themselves.”

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