TOUGHER European regulatory rules are likely to prompt a new wave of takeovers among small stockbrokers and fund managers, says an investment trade body.
Tim May, chief executive of the Association of Private Client Investment Managers and Stockbrokers (Apcims), claims a key driver of consolidation will be an increasing use of “regulations” rather than more traditional “directives” coming out of the European Commission.
“The key difference is that EC directives need a measure of national state consultation. But regulations do not need national consultation, even though they can set local law in member states,” he said.
“The danger is that this sort of initiative from Brussels gets in under the radar but still adds to our member firms’ costs. There isn’t malice behind this practice, but there is a strong law of unintended consequences.”
May gave as an example a complex regulation on short-selling in the market that came into effect on 1 November, which could cause liquidity problems for small British broking firms.
A recent Apcims discussion paper stated: “In practice the short-selling regulation could still create a significant market failure in the small cap market by creating a material disincentive to market maker participation and [effectively remove] the equity market as a source of finance to small and medium enterprises”.
Apcims, which has a significant membership in Edinburgh and Glasgow, believes that extra regulatory costs will mean no let-up in a wave of consolidation in the sector over the past five years.
May said most of Apcims’ member firms were in reasonable shape, but trading volumes on average were down 10 per cent, and increasing regulatory costs in Britain and Europe were adding to the headwinds.
“There’s bound to be some more consolidation in the sector due to this regulatory overhang,” he said. “It will continue for a good while yet. You put two financial firms together and you don’t have the same compliance costs, you share them. Consolidation has not run its course.”
In the past five years, takeovers in the sector have included BNP Paribas Private Investment Management; Williams de Broe and Evolution coming together over time as Investec, and Duncan Lawrie Asset Management being formed from Will Martin Asset Management and Douglas Deakin Young.
Others include HB Markets and Simplystockbroking forming Beaufort International Associates, and Principal Investment Management and Merchant Securities merging to form Sanlam Private Investment.
May sounded an upbeat note, however, in saying that despite the regulatory headwinds Apcims’ members remained better placed to serve their 4.5 million customers than some bigger product and volume-driven financial services firms.
“At the end of the day, our members are not just selling product, it is the relationship-based stewardship of savings, built for the long term for clients and their descendants,” he said.
“That makes smaller stockbrokers, investment managers and private banking operations more resilient in a downturn.”