Asset managers may have to undertake a "root and branch" reassessment of business models amid a wave of European regulation set to trigger "huge upheaval", warns State Street.
In its report The Changing Shape of European Investment Management, the asset manager said the shift in regulatory focus from enhancing market efficiency to investor protection will impact product development, drive up costs and force a rethink in marketing and distribution strategies.
"Regulation will cause huge upheaval, forcing managers to reconsider many elements of their model from how they structure their operations to the type of product and investor they target," said the report.
The implementation of initiatives such as MiFID II, UCITS V and the European Commission's review of packaged retail investment products (PRIPs) will create uncertain ramifications in terms of competitiveness, operational efficiency and investment performance, said State Street.
While increasing investor protection, the report said the raft of measures is also likely to increase complexity in terms of reporting and costs and have fundamental ramifications on how investment products are developed, marketed and sold.
In particular, it said regulatory constraints could increasingly becoming the starting point for product development.
"Product development teams will need to collaborate closely with their risk and compliance counterparts to ensure new products are compliant, workable and fit for market," said senior managing director and head of investments for State Street Global Advisers in Europe, the Middle East and Africa Mike Karpik.
He added asset managers will have to be "highly cognisant" of the type of investor they target in light of greater regulatory scrutiny resulting from hedge fund-like strategies becoming available to a greater audience.
Asset managers will also be hit with escalating costs as increased reporting demands necessitate additional investment in technology systems and employee training. This, it said, could trigger an outsourcing drive to external service providers.
Industry consolidation could also ramp up a gear as smaller, more entrepreneurial, asset managers decide to join larger groups with the muscle to support their increased regulatory requirements.
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