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Mutual have hit back, warning some
firms may inflate their trading costs to
protect revenues.
Bad timing
Asset managers are worried that excess
pressure on their fee models could
wreak damage on their businesses. The
costs of running operational processes
at fund managers is no longer insignif-
icant. Institutionalisation – at least in
the alternatives world – has introduced
new responsibilities and requirements.
Institutional investors, having been
admonished for their pitiful standards
of operational due diligence post-Mad-
off, are demanding more information
in greater detail than ever before. This
comes at a cost to the manager.
New risks like cyber-security, some-
thing many firms previously discredited
as an obscure threat – have to be taken
seriously, and this requires thorough
investment in technology. Corporate
governance is no longer a process of
appointing a perma-tanned, inexperi-
enced director at limited expense, but an
individual who takes their role serious-
ly and one who is now subject to the
Senior Managers & Certification Regime
(SM&CR), at least in the UK.
The regulatory environment for man-
agers is generally unfriendly, certainly
in the EU. Many firms had assumed the
worst of the regulation – such as the
Alternative Investment Fund Manag-
ers Directive (AIFMD) – was behind
them, only to realise MiFID II was being
24
Global Custodian
Summer 2017
introduced in 2018, and this looks set to
be the most challenging of the lot. Brexit
is certainly front of mind at many UK
asset managers, and some may be forced
to make substantial adjustments and
locate key personnel within the EU. All
of this adds cost at a time when revenues
are subsiding. Asset managers have little
choice, but to minimise their overheads,
and service provider fees – including
custody – are feeling the strain.
“Fee pressure on custodians has been
applied for some time now although it is
not specific to asset managers but across
all client segments,” says John Van Verre,
head of global custody at HSBC Securi-
ties Services. “There is now increased
pressure on the asset management com-
munity’s costs. Operating a regulated
business brings regulatory costs, and this
has impacted fund managers too. It is a
logical development that asset manag-
ers evaluate their own service provider
charges as a way to reduce their overall
cost base.”
Unfortunately for the custodian banks,
this is happening at a time when their
own model is being challenged. Rev-
enues at custodians have been falling
since the financial crisis. The perpetually
low interest rates imposed by Central
Bankers globally have impeded their
ability to generate margins off deposits.
FX trades executed on behalf of institu-
tional investors used to yield significant
returns for custodian banks, but client
and regulatory pressure on such profits
have had adverse consequences.
Expectations rising
In addition, regulatory costs such as
Basel III have rendered certain banking
activities unsustainable. Fund managers
may agonise over AIFMD and UCITS V
depositary rules, but it also introduces
huge costs and risks into the custody
chain. Other regulatory pressures in-
“If one manager is paying
materially more for custody
than someone else, the
investor may ask why.”
ASSET MANAGER
clude criticism by the FCA that contracts
between clients and custodians “are usu-
ally around 10 years in duration, creating
barriers to switching,” adding terms are
often more beneficial to the banks. This
could be a precursor to regulatory action,
although the FCA did acknowledge there
was decent competition on custody fees.
To add to the challenge, the service lev-
els demanded by asset managers of their