The EU’s Capital Markets Union could offer great opportunities to the asset management industry but must also deal with the impending risks of potential regulation
Diversifying corporate financing and decreasing dependency on bank loans lies at the center of the EU’s Capital Markets Union (CMU) project, supporting the EU’s overarching priority to generate growth and jobs.
While the project – of which a comprehensive stock take is expected in 2017 – could lead to more competition for banks, it seemed like a blessing for the asset management industry.
Doubt began to creep in over the project’s future following the departure of the European Commissioner-in charge, Jonathan Hill, and the starting gun being fired over the UK’s departure from the UK. The UK had been one of the main drivers of CMU, in contrast to countries such as France and Germany with their strong banking industry. But shortly after the Financial Services portfolio was given to Commission Vice-President Dombrovskis he cleared all doubts by emphasising that the creation of an integrated Capital Market Union among the soon to be remaining 27 EU countries remained at the top of his political agenda. With the potential loss of ‘The City’, it was even more important for the EU to have a well-functioning capital market. Good news for the fund industry!
While Dombrovskis reiterated his strong commitment last week – some of his comments caused concern among the fund community. Speaking at the European Supervisory Authorities’ (ESA) Consumer Protection Day, the Vice-President announced he had tasked the ESAs to analyse the performance of investment funds and the fees they charge: “We need to ensure more competition and better service for consumers”.
His announcement did not come as a complete surprise to the industry; the UK Financial Conduct Authority (FCA) had already started a similar investigation in 2015 and is expected to release its interim report at the end of this year ahead of a final report that is expected in 2017. Nevertheless, Dombrovskis’ announcement curbed the industry’s enthusiasm for the CMU project given the risk of legislative actions not only on fee setting but also on fund industry’s underlying business model.
Brussels legislators have already scrutinised the transparency of fees which led to the introduction of the Key Information Document for funds (existing for UCTIS but yet to be implemented for PRIIPs). The debate will now focus on the actual costs and setting of fees. Without doubt this stems from growing concerns about high distribution costs, particularly for cross-border sales; the Commission has made no secret that it considers distribution costs to be too high in Europe. This adds to other challenges that the fund industry is experiencing and could lead to EU legislation, namely digitalisation (eg impact of robo-advice), and tensions between active against passive fund management. The growing Exchange-Traded Fund (ETF) industry is putting pressure on active management which has been unable to significantly beat the benchmarks. In that regard, the FCA has already started to closely scrutinise absolute return funds (funds that claim to deliver returns in all market conditions). At EU level, policy makers are also raising questions about closet trackers (actively managed funds that are close to index trackers).
Over the next several months the Commission will therefore focus its CMU efforts on asset managers and investment companies. Transparency, performance and fee setting will be looked at by the EU institutions but other issues such as remuneration and systemic vulnerabilities will return to the agenda in the context of the review of the rules on capital requirements for investment firms. The CMU project offers great opportunities for the fund industry, but it will need to step up its game in communicating its value proposition if it wants to grasp the full benefits.
Robrecht Vandormael is Senior Director in FTI Consulting’s financial services team in Brussels.