Cad 3 will hit asset manager profits, says Mercer Oliver Wyman

The European Union’s proposed third capital adequacy directive (Cad 3) will force European asset managers to hold significantly more capital than at current levels. This will reduce their profitability, and could prompt a shake-out in the industry, according to new research by consultants Mercer Oliver Wyman.

Although there may be some relaxation of the Cad 3 framework for certain investment institutions – including those that do not trade on their own account or handle client money – the US consultancy believes the new directive will bring about “a much-needed upgrading of the industry’s risk management practices”.

“We estimate that the average asset manager not deemed to be exempt would have to hold back around 10% of profits over the next three years to build up the minimum capital requirements,” said Mercer Oliver Wyman. This means banks with asset management subsidiaries will take an implied return-on-equity hit that might make them “reassess the attractiveness of the business”, the company said.

The consultancy also believes some asset managers may try to relocate outside of the EU.

But Mercer Oliver Wyman takes a bullish view of the situation, saying non-exempt asset managers that upgrade their risk management procedures in line with the EU directive could promote their strong risk disciplines as an area of competitive advantage over their peers.

Cad 3, which largely draws on the new capital adequacy framework, Basel II, being drafted by the Basel Committee on Banking Supervision, is set for implementation by the end of 2006.