BVI: EU needs to deliver on its promise of better regulation
Following a period of strong growth, the European investment funds industry now faces the task of adapting to changed market conditions resulting from increasing pressure on margins and from digital transformation. Asset managers have already automated a large number of processes in recent years. Many of them plan to expand their investment in technology, artificial intelligence and big data even further. ‘Over the next few years, European asset managers intend to focus their resources on improving their global competitiveness. However, complying with EU regulations still ties up enormous capacity which is then unavailable to asset managers for other purposes,’ said Thomas Richter, Chief Executive Officer of the German Investment Funds Association BVI, at the annual media conference. According to BVI’s autumn survey, the greatest challenge the investment companies are facing, after increasing pressure on their margins and digital transformation, remains over-regulation.
The number of EU regulatory initiatives of relevance to the investment funds industry has virtually doubled since 2016. Since then, the number of EU directives and regulations has grown from 39 to 72, implementing measures for the application of these provisions from 305 to 537, while the 232 guidelines and recommendations have now become 455. ‘We would like to remind the EU of its proclamation of better regulation. Before they draw up new rules, they should examine the overall impact of existing rules and either improve or simplify them as necessary,’ explained Thomas Richter. He named the Markets in Financial Instruments Directive (MiFID) II as an example of a directive in need of improvement. MiFID II is supposed to protect consumers but what they actually end up with is excessive amounts of product information and less advice.
Better regulation is important, but no more so than seeing things from a wider perspective. The US approach to such matters could serve as a model. Financial regulation in the United States does not simply target consumer protection and financial stability – it also regards the strengthening of the domestic finance industry as an important objective. As Thomas Richter puts it: ‘The global competitiveness of the European fund industry should also be a legitimate objective of EU financial market regulation. Asset managers are the backbone of old-age provision and provide funding to companies and governments in Europe. When weighing up their decisions, EU law-makers and regulators should also give consideration to the investment funds industry’s global competitiveness.’
Realise potential of sustainability in full
Sustainability is an increasingly important issue for the investment funds industry. According to the BVI survey, 64 percent of investment companies questioned expect high or very high demand from institutional investors for ESG (environmental, social and governance) investments in 2019. Against this backdrop, BVI mostly welcomes the EU’s legislative package aimed at promoting a sustainable financial system. The Commission’s proposals are important cornerstones for the promotion of sustainable investments in the EU. The objective is to involve companies and investment fund providers in the process, in their capacity as users of the regulations. ‘Many of the proposals contained in the legislative package are already included in BVI’s Code of Conduct. We view it positively that the Commission now intends to turn them into legislation that will apply across the EU,’ commented Thomas Richter. From a practical viewpoint, however, some of the details are still in need of adjustment. For example, a classification system for ESG investments should not exclusively include ‘green’ activities; it should also permit ‘shades of green’ in order to facilitate companies’ transition into the climate-neutral economy. In order to allow asset managers to meet their transparency obligations vis-à-vis investors, governments should be compelled to publish ESG reports, just as companies are. Furthermore, all existing international ESG investment strategies – as for instance the ‘best-in-class’ approach – should be recognised.
Retirement provision: expand Riester pension schemes rather than introducing sovereign wealth funds
For a variety of reasons, BVI rejects proposals from politicians and consumer protection groups to introduce a sovereign pension scheme. For one thing, a sovereign pension scheme would distort competition in the pension provision industry. A sovereign wealth fund would have hardly any marketing or distribution costs – unlike private retirement scheme providers. There is also the danger that the fund’s investment decisions could be influenced by political motives. The frequently drawn comparisons with the Swedish AP7 pension fund also hold water. AP7 is part of the statutory pension system (first pillar), not the private (third) one. Until they reach the age of 55 scheme members place 100 percent of their investment in equity funds. The fund also uses leverage techniques to increase returns. It is rather unlikely that a German sovereign wealth fund would adopt a comparable risk/return strategy. That is why BVI is in favour of an expansion of the established Riester pension scheme (offering special subsidies and tax incentives) by simplifying subsidy methods and the administration of matching state contributions, by expanding the group of eligible persons (e.g. to include self-employed people) and by providing flexible contribution guarantees. It would also be a good idea to provide pension plan savers with regular across-the-board updates on how their pension scheme is performing.
The industry regards Brexit consequences as manageable
Investment companies are rather relaxed about the challenges posed by Brexit. The BVI survey reveals that a clear majority (74 percent) of respondents have no or few concerns about a no-deal Brexit without a transition period. Only 18 percent think they will be highly affected. One of the reasons for this result is that investment companies delegate merely a small percentage of their portfolio management to the United Kingdom. London-based firms manage only seven percent of the specialised institutional investment fund (Spezialfonds) assets and three percent of the retail fund assets in Germany. Following the announcement that there is to be supervisory cooperation between the EU27 authorities and the UK Financial Conduct Authority (FCA), BVI members should have even less reason to worry about Brexit. In addition, the UK market has less significance in the EU than the German market. Germany accounts for 22 percent of EU investors’ fund assets while the UK accounts for just 14 percent. When it comes to direct investment fund holdings per inhabitant, the UK occupies fourth place with an average of EUR 5,200, lagging behind Italy (EUR 8,500), Germany (EUR 7,100) and the Netherlands (EUR 5,400).