The fund industry is facing major challenges: pressure on margins remains high, consolidation is on its way and technological progress has to be tackled. More than ever, European asset managers will need to focus their resources on boosting competitiveness in the coming years. However, EU regulation is tying up enormous capacity for years.
Since the creation of the European System of Financial Supervision in 2011, European management companies have had to implement tons of legislation. We have so far counted 72 directives and regulations targeting our industry on Level 1, 537 implementing measures on Level 2 and 455 guidelines and recommendations on Level 3. Many of these requirements are intended to protect consumers, but often fail to achieve this objective. The results are bureaucratic monsters such as the new Markets in Financial Instruments Directive (MiFID II) and the regulation on packaged retail investment products (PRIIPs).
The massively increased documentation and transparency requirements on investment products and services create red tape for investors and waste asset managers’ resources. The suitability test under MiFID II, for example, takes a huge toll in terms of effort and time. As a result, investors shift to advice-free distribution channels in order to avoid the hassle.
The amount of information advisers have to hand out due to MiFID II and PRIIPs is vastly non-relevant or even contradictory. This is irritating for end investors and not helpful. Consequently, they buy fewer stocks and funds. Retail investors today have fewer investment products to choose from than ten years ago: in spite of – or rather because of – investor protection legislation.
This constant stream of new regulation must come to an end. Asset managers need a respite from sometimes questionable regulation in order to release resources for their business and to invest in their future. The EU could make a first important contribution in this respect by creating the ‘better regulation’ it proclaimed in 2014. For one thing, legislators should start reviewing the impact of existing rules and reducing over-regulation. Just as important, they should broaden their focus and take the competitiveness of the industry into account.
The US approach to financial regulation could serve as a model. While European institutions primarily focus on how to protect consumers and avoid systemic risks, the Americans pursue more comprehensive regulatory objectives.
Consumer protection and financial stability are definitely of importance for US regulators, but they deem strengthening the domestic financial industry to be another issue of relevance. After eight years of restrictive EU regulation, however, such a viewpoint would be equivalent to some kind of revolution.
This aspect has so far not appeared to be worth promoting in Europe. This must change as a matter of urgency. Funds are important for the economy and society. Asset managers act as providers of capital for companies, thereby enabling growth and innovation. Funds are also the backbone of old-age provision and enable investors to participate in economic growth.
At any rate, much would be gained if European legislators were to consider asset managers worth promoting as providers of retirement provision and financiers of companies and states, rather than as a threat that needs to be controlled.
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