Funds Europe – Finally, how is the regulatory environment in the EU and UK supportive or otherwise for the success of the ETF industry? And what about factors beyond regulation?
Mahmood – A decade ago, regulation was developing quite slowly but it has now ramped up. There have been some good regulations, in particular around cost transparency through MiFID [the EU’s Markets in Financial Instruments Directive], but also some not-so-good ones, such as on intra-fund trading costs. Perhaps part of the difficulty in getting ETF-specific regulation standardised is the structure of the European market. Markets outside the US, Europe specifically, suffer a lot from fragmentation. There are different jurisdictions, different currencies, different exchange listings, and then there’s post-trade complexity on top of that. All this makes it difficult to make aligned regulation across the board, which is why we don’t have a consolidated tape from the regulator.
Guignard – The focus on costs is still beneficial to ETFs because in the end, that’s a strong advantage of the product. The RDR-like regulation forbidding rebates [as in the UK’s Retail Distribution Review] has also been very supportive to the growth of the ETF market. On the contrary, today ESG regulation could be a threat to the Ucits mechanism, as it tends to put back an extra fragmentation with local regulation, local labels being very different from one country to another, sometimes being incompatible with another. This creates a kind of protectionism in some countries that is detrimental to what had been done with the Ucits harmonisation at the European level. I think it’s very important that the European Commission takes back the initiative and puts some common rules in Europe so that we can really get back to a European scale and not to a local country one.
Guthrie – I don’t envy the regulators’ jobs, they do things at a very high level in a very interconnected complex market and they give broad mandates. They won’t always have perfect consequences because that’s not the world that we live in, but high-level trends like a focus on fees and a focus on transparency are really supportive, and for the most part have been very additive.
Anything that doesn’t promote competition at a European scale, anything that enables people to protect local markets, local ways of doing business, local exchanges at the expense of European scale is kind of detrimental and should be looked to be worked out at that higher level. Where Europe is going to thrive is where we can get the efficiencies from the scale of the continent to individual ways of doing business.
Garcia-Zarate – That’s one of the key problems. The regulator is a very useful punchbag and everybody wants to have a go at them. At the European level, there is this almost a political issue that rules are issued at European Union-wide level and then are left to the individual interpretation of national countries. Then you get good intentions that come to nothing because different countries apply the rules in different ways. Unless we come up with a common rule applied equally, then it’s going to be difficult.
Baron – We’ve talked about education throughout and we believe more needs to be done from the industry perspective to highlight the benefits and key features of ETFs and how they help investors get access to some portions of the market.
In my view, I would like more regulatory attention on helping retail investors access these products and alleviating barriers that exist either on the distribution side or maybe the technology side as, for example, some platforms still cannot accommodate the trading of ETFs. There is much more dialogue to be had.
Shah – I think while ETFs are a simple product, considering the wider use by retail investors of ETFs, I guess that’s where there are more regulatory angles that need to be looked at.
I understand the institutional investors are more sophisticated, they would have research teams, but considering there are thousands of ETFs out there for very niche, even illiquid underlying asset classes, which a retail investor would have no clue of, then they might just get sucked into them for one reason or another, without being fully aware of what they’re getting into. This is where a regulatory oversight is probably needed.
If there was more regulatory standardisation, especially in Europe, that would probably bring both the investors and the industry together more, and hopefully help to achieve a common goal, whether it’s on the transparency side or in making the product more popular, from the ETF industry’s perspective, because there is the backing of the regulator.
Guthrie – I don’t think anybody is arguing that financial regulation doesn’t have benefit or that there shouldn’t be oversight or there shouldn’t be retail protection, but I do think, to Caroline’s point, that you want to make sure that it’s not over-engineered for ETFs. I think we’ve seen instances where they have looked to, in some instances, treat ETFs as separate things to the existing financial fabric, like not including them in MiFID I, things like this, in the post-trade transparency requirements or trade report. This was an oversight in thinking that they were markedly different.
We want to offer the best possible products in a competitive environment on a pan-European basis. ETFs are low-cost, transparent, there’s a competitive market for trading to keep costs down, there’s an aggressively competitive market for products that keeps the industry innovating at a pace that no other segment innovates at, and no other segment looks after their clients at because of. They can come at it from that angle instead.
Baron – ETFs have been in existence for over 20 years and with time, people will become even more familiar with them. I also think the media has a critical role to play in educating the public about ETF adoption and there is still more to be done here.
I have been pleased to see more press coverage on the merits of ETFs over the past few months as I strongly believe that ETFs are one of the best financial innovations of the last 20 years.
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