A Look Ahead: Asset Managers and Regulators Change Their Focus

What is top of mind for asset managers across Europe? We break down the hot topics from this year’s European Fund and Asset Management Association (EFAMA) Investment Management Forum.

The annual gathering of key decision makers in European asset management took place in Brussels just days ago, with asset managers, banks, regulators, government agencies, and industry practitioners gathering to discuss the state of the business. Here are the key takeaways from the recent EFAMA Investment Forum:

Regulatory priorities are shifting from an agenda of protection to one of growth

While 2017 was spent dealing with large scale regulatory assessments and implementations such as MiFID 2, 2018 should be marked by asset managers having more opportunity to focus on their business and room to capture secular trends on products and distribution.

In contrast to previous years, the 2017 event was marked by a positive mood and focus on growth – a shift only possible now that the global regulatory agenda to protect and reduce systemic risk has largely moved from rule-making to implementation. We are now seeing greater consideration of the role asset management can play in delivering constructive societal outcomes, such as financing infrastructure projects, reducing state pension burdens, and facilitating higher levels of long term savings.

2018 is unlikely to be marked by “mega regulations.” Instead, the regulatory agenda should tilt toward revision and updates to existing rule-sets, greater alignment of investor and asset manager interests, and stimulating economic growth using regulatory levers such as the Capital Markets Union (CMU). There is also a focus on sustainable investment and for asset managers being socially conscious, as we see in environment, social and governance (ESG). “Strong growth and interest from all client segments is good news for the planet and commercial asset managers,” said Timothy Bishop, Senior Advisor, Financial Affairs Division, Organization for Economic Co-operation and Development.

Asset managers can make the EU economy less reliant on banks

Asset managers have room to consider greater activity in the private debt and loan origination space, as well as further engage in the private equity space (especially in the case of small and medium EU enterprises). These activities underpin the goals of CMU.

Several contributors commented that the European economy places too much reliance on banks for financing and there should be a better framework for equity financing or non-bank lending to the small and medium enterprise sector. Xavier Rolet, CEO of the London Stock Exchange, urged policy makers to encourage an economy in which smaller companies could more quickly and easily access non-bank financing through direct lending. The European Commission plans to do this by focusing on the CMU and aid more private sector funding of the real economy. “We’ll do all we can to push the CMU agenda. We have to rebalance the lending structure in the EU. It is all about new sources of financing for industries and companies,” said Ugo Bassi, DG FISMA, Financial Markets, European Commission.

Regulators are looking to balance the benefits of tech innovation with protection of investors

As asset managers look to leverage technology to evolve their business models, regulators want to be sure the advancements are acceptable. Regulators acknowledge the benefits of innovation but also recognize that any use of modern technology must be mindful and respectful of all existing requirements and the regulated infrastructure that already exists.

Conference attendees and regulators expressed cautious optimism about the use and advancement of emerging technologies, like robo-advisors and distributed ledger technologies. Market participants believe that policymakers need to prescribe rules and standards around these solutions to foster widespread adoption. Just days before the conference, the European Securities and Markets Authority (ESMA) issued a statement highlighting the risks of Initial Coin Offerings. Meanwhile, asset managers were keen to praise technology and the transformative powers it may have for the industry. “Blockchain technology shows great promise in terms of enhancing distribution mechanisms in the asset management industry,” said Matthieu Duncan, CEO, Natixis Asset Management. However, in his keynote, ESMA chair Steven Maijoor said in “taking a balanced approach to innovation, we need to support firms but also to protect consumers.”

Policy initiatives aimed at addressing the pension funding gap offer new growth opportunities ‎for asset managers

The consultation on the framework of PEPP remains ongoing and will ramp up in the first few months of 2018. Any asset managers who see PEPP as an opportunity to enter or expand their presence within the EU pension space should weigh in on the policy debate.

The Pan-European Pension Product (PEPP) was widely discussed as an area of opportunity for asset managers. However, to fully grasp the opportunity, there are many points that need to be resolved including product guarantees, the form which default option products take, and the taxation frameworks. PEPP would be sold cross border to retail investors to aid their long-term pension funding requirements, but in many ways, its construct, goals, and distribution strategy bear similarities to UCITS. Some are now beginning to wonder if PEPP as a standalone regulation is required and perhaps would work better as subset of UCITS.

Regulators remain focused on fee transparency and disclosure

While asset managers are fully aware of the focus both investors and regulators are placing on transparency and fee levels, this review will scale up since ESMA has announced plans to deep dive into the issue for UCITS in 2018.

ESMA soon plans to look at fees, fund competitiveness, and join the industry’s active versus passive funds debate. The themes of disclosure, transparency, and alignment of interest were evident in several EFAMA discussions. The industry recognizes a need to better align investor and asset manager interests through fee structures. ESMA also recognizes that multiple methodologies for fee disclosures to retail investors (e.g.: UCITS, MiFID 2, and PRIIPS) is not ideal. It is likely they will look to address this and issue in an industry consultation to come up with a uniform methodology to use for fee disclosures for all EU retail products in 2018.