The Luxembourg funds industry association, Alfi, holds its European Asset Management Conference next month. Funds Europe talked to participants and others in Luxembourg about relevant topics.
JULIAN WEBB, HEAD OF WORKPLACE INVESTING, FIDELITY INTERNATIONAL
Do you welcome the EU’s Pepp proposal?
Europe is facing a challenge regarding retirement savings and highly fragmented personal pension markets across the EU. Some of the larger EU member states may see a decline of over 20% in their public pension replacement rate according to the European Commission Aging Report.
The Pepp (Pan-European Personal Pension Product) is designed to encourage personal retirement savings across Europe by providing greater competition, choice and scale for personal retirement solutions.
A level playing field across personal pension providers and products – and transparency on value-for-money aspects – is therefore crucial. Tax incentives are a key component to channel savings into Pepp pension products that generate income for retirement.
The portability of the Pepp through an EU product passport is a critical feature and value-add of the Pepp to ensure consumers can efficiently accumulate pension savings also in case of a mobile lifestyle.
A holistic personal retirement planning approach thus across state, occupational and complementary personal pension products is needed as a basis for a stronger single EU market for future generations.
The Pepp, as an EU-labelled personal pension product, is a key tool to increase consumer awareness that personal retirement savings is essential to secure a safe financial future.
RAVI BEEGUN, HEAD OF ASSET MANAGEMENT, KPMG LUXEMBOURG
What are the key regulatory issues the European funds industry is facing?
2019 will see increasing geopolitical risks and geo-economic tensions affecting global markets, probably negatively.
What’s different this time is that some geopolitical risks are disrupting the structure of the market itself. Brexit, for example, cuts UK access to the EU single market. It therefore requires asset managers distributing funds internationally to rethink their business models and operating locations, while navigating uncertainty. Regulators have been renewing calls for proper Brexit contingency plans to be in place by March 29. All this comes at a cost, in terms of lower growth, added restructuring costs or extra time spent.
What isn’t different this time is that some investors with performance losses will complain that existing rules did not protect them enough. To the extent that such claims are valid, themes such as product governance and suitability, investor transparency or ESG criteria may receive more attention, and potentially new rules.
The key issue, for the industry, is therefore not really new: it is to find scalable, cost-effective solutions that can quickly be adapted to comply with new regulations. The way forward is to design innovative, technology-led solutions which can be mutualised across a broad range of market actors, so as to remove multiple layers of effort and costs. So far, however, legacy technologies have proven to be a formidable barrier to overcome.
SILKE BERNARD, PARTNER AT THE LUXEMBOURG OFFICE OF LINKLATERS
Will Pepp revolutionise the asset management sector?
The forthcoming European Regulation for a Pan-European Personal Pension (Pepp) product will provide Europe with an opportunity asset managers may have been dreaming of for a long time.
The Pepp (in its different forms) can be marketed to 500 million European citizens who will subscribe for a harmonised savings product that will host their personal retirement provisions. Savers can (in principle) not withdraw before retirement, which will allow asset managers to implement truly long-term strategies. The Pepp has the potential to unlock large amounts of private money which so far were kept in savings accounts or in the piggy bank.
Why is Pepp different from other products? The Pepp is independent from the savers’ employer (or unemployment situations), from their country of residency and subsists whatever changes personal life may bring. It takes some of the complexity of modern lives off the savers’ shoulders and provides them with a simple and flexible product to prepare for retirement from early ages on.
For asset managers, the Pepp may require some rethinking of business models. However the potential is enormous. The Pepp could well be one of the most promising products for the future of asset management.
STEEN FOLDBERG, MANAGING DIRECTOR AND HEAD OF LUXEMBOURG, ABERDEEN STANDARD INVESTMENTS
What are the most important issues facing the funds industry that you expect to be discussed at Alfi’s spring conference?
As an industry, we must prioritise the needs of our investors above all else. Failure to do so can quickly become detrimental to our clients’ aspirations and to our businesses.
The good news is that evolving technology allows us greater proximity to our increasingly digitally aware clients, as well as the next generation of investors. However, we must remember that most funds and investment solutions are simply components for constructing portfolios and managing asset allocation. Therefore, we need to provide investors with the means to electronically consolidate investments, so they can better understand and monitor their overall portfolio.
We must also remember that clients have different investment time horizons, tax and cash flow requirements. This means providing innovative investment solutions that help them meet these requirements through informed decision-making. To achieve this, we need to shorten the distance between investment solutions, portfolio management and clients’ requirements.
If used correctly, technological innovation can also allow asset managers to turn that large part of the population known as ‘cash savers’ into genuine ‘investors’. The results will be mutually beneficial: better outcomes for clients; improved client satisfaction and retention for asset managers. It’s now time to ensure clients are centre-stage again.
MICAELA FORELLI, HEAD OF EUROPEAN DISTRIBUTION, M&G INVESTMENTS
What are the key challenges facing the asset management industry that you expect to be discussed at Alfi’s spring conference?
As an industry, we faced challenging markets in the last half of 2018, and for many European countries, continued uncertainty around Brexit, local unrest and political instability. However, in Luxembourg, on a micro level, there is a sense of growth and opportunity in the industry.
As the guidance around ‘substance’ from [Luxembourg’s regulator] the CSSF begins to crystallise into a raft of newly created jobs for Luxembourg, so we see the impact on people and the local economy.
Luxembourg has become a choice destination for financial services firms looking to develop their European and international platforms, and by necessity and desire, they are growing their local workforces particularly across risk, legal and compliance.
Where is this new talent coming from? Will they stay in Luxembourg and how will the local employment change now that the market and talent pool is deeper and wider than it has ever been?
I’m interested in both how ‘substance’ is both an opportunity and potentially an obstacle as the landscape in Luxembourg shifts and becomes more locally competitive. I’m interested to discuss and see how financial services firms will adapt to differentiate themselves to attract and keep talent.
TANGUY KAMP, FUND MANAGER OF ASIAN EQUITIES AT BLI – BANQUE DE LUXEMBOURG INVESTMENTS
How do you see the changing face of European asset management over the coming years?
Although ten years ago, “too big to fail” was supposed to disappear in the financial world, it is now apparent that the latest MiFID measures will contribute to exactly the opposite, i.e. make life even harder for small asset management organisations.
Look, for example, at a management company’s research costs. These now have to be unbundled from share transaction fees and paid for like any other service. Perhaps in future, these fees will have to be paid directly by the management company, with an immediate impact on its margins.
The new directives require companies to resort increasingly to compliance specialists to ensure absolute adherence to their obligations to the supervisory authority.
The cost of the IT tools and databases needed for portfolio management and the fees connected with distributing products will become too high for small firms to bear; this could force small organisations into merging so that their research costs can be spread over a bigger asset base.
In addition, stiffer competition from ETFs is likely to put further pressure on costs. In future, asset managers will have to justify their higher management fees either by better performance or greater differentiation through a distinct investment philosophy that will have to be expertly communicated to clients for them to accept it.
CHARLES MULLER, BARRISTER AT THE LUXEMBOURG BAR
What big developments in fund regulation are on the horizon?
The year 2019 is going to be a difficult year for European policymakers. Not only does the ongoing Brexit saga eat up a lot of time for a result that can only be detrimental to both Europe and the UK. But also, the upcoming electoral cycle with a new EU Parliament followed by a new EU Commission and civil servant rotation normally brings the machine to a standstill.
Not to forget that the rise of eurosceptic parties in Europe could create a situation where majorities in the EU Parliament would be more difficult to find.
Nevertheless the EU Commission is trying hard to convey positive messages, especially in the context of climate change and more generally in sustainable finance.
There are initiatives relating to taxonomy, disclosures and benchmarks, among which there are also proposed changes to Ucits, the AIFMD and MiFID in order to include sustainability risk assessments.
These ESG trends have been embedded in Luxembourg in a new “sustainable finance roadmap” and a “national action plan for business and human rights”. Responsible finance is (finally) going mainstream.
ROSS THOMSON, MANAGING DIRECTOR OF FUNDROCK
What do you believe will be the main impact of CSSF 18/698 circular on the asset management industry?
The initial media reaction seemed to focus largely on the new aspects covering directors’ mandates, but our internal focus was more on the requirements surrounding AML/KYC [anti-money laundering/know your client] and also aspects around the harmonisation of Ucits ManCo/AIFMs.
As a ManCo and ACD [authorised corporate director] provider covering fund product domiciled in Ireland, Luxembourg and the UK, we would like to operate under a consistent regulatory framework. That also aligns, I believe, with Esma’s [the European Securities and Market Authority’s] focus on regulatory equivalence and I have found it interesting on recent trips to Dublin to see how keenly read 18/698 was, particularly within Irish law firms.
We still see massive growth potential in Ireland post-CP86 and ‘self-managed’ funds adopting the full ManCo model and believe consistency across the two main fund jurisdictions outside the UK to be a good thing.
Looking at this from a third-party ManCo perspective, I do believe 18/698 will likely prove an additional catalyst for M&A activity within the sector.
Some of the smaller ManCos will look to exit, given the increased focus on substance. In-house managers are also facing increased costs as they ‘staff-up’ for this and for other factors like Brexit.
I do believe 18/698 was a massive step forward as it codified a lot of areas where we had seen different interpretations being taken by market players. Consistency is always a good thing!
JANE AMBACHTSHEER, GLOBAL HEAD OF SUSTAINABILITY AT BNP PARIBAS ASSET MANAGEMENT
How do you envisage the future development of ESG investing?
We have seen unparalleled progress on global efforts to address the world’s biggest sustainability challenges. However, this progress has been tempered by the rise of political instability and populism. This is a phenomenon that may be with us for some time as long-term trends including globalisation, technological change and inequality of opportunity generate social and cultural insecurity.
So, what can we do? Enlightened asset managers and asset owners have the potential to embrace their role as future makers. They can use their assets and influence to push for a sustainable world – one that facilitates their ability to generate long-term returns for their clients, with the added benefit that we end up with a world into which people actually want to retire.
Growing up is a process of refining and further embedding the concepts and tools that leading investment professionals have been using for years.
BNP Paribas Asset Management has been addressing sustainable investment since 2002 and in 2012, committed to integrating environmental, social and governance (ESG) criteria across our open-ended mutual funds.
RICHARD STREET, MANAGING DIRECTOR, HEAD OF EUROPE, MIDDLE EAST AND US, GLOBAL CLIENT COVERAGE, RBC INVESTOR & TREASURY SERVICES
What are the areas of tech that you expect to impact the asset management industry the most over the next three years?
Data strategy has become a big point of discussion with our asset management clients. We expect the next few years to continue to be defined by the implementation of new technology and data strategies that assist asset managers in deriving the most value from their businesses and delivering maximum returns.
To this end, given the significant expenditure and complexity to acquire next-generation data technology, the asset management industry is likely to increasingly collaborate with custodians whose platforms do not simply offer custody and investor services, but also provide the data and analytic services that yield more robust controls and advanced data insights.
Asset managers can leverage their asset servicing providers’ technology tools and talent to accelerate their own strategies. As an example, effective data strategies can help asset managers identify trends and exceptions, help manage third-party relationships and distribution channels and respond to regulatory requirements.
GERALD REHN, HEAD OF INTERNATIONAL PRODUCT & STRATEGY, BNY MELLON INVESTMENT MANAGEMENT
What does the future hold for European investment management and distribution after Brexit day on March 29?
The UK’s vote to leave the European Union has expedited the need for substantial changes to structure, location and substance of firms in Europe. We believe participants will focus on key changes in the following areas:
Investment management businesses concentrated in major headquarters with light substance in countries will convert to multiple locations, with sufficient presence and substance to handle large-scale business locally.
Clients’ previous indifferences to major EU fund domiciles will transition to clear preferences of specific domiciles due to familiarity with legal systems, language preferences and proximity to client bases.
Acceptance, though historically reluctantly, by regulators of the potential for regulatory arbitrage will give way to regulation to actively close local loopholes and level the playing field across all markets.
Finally, outsourcing will be carefully selected, chosen only when the function is considered lower risk combined with lower priority for clients.
The new world will be more fragmented, yet more robust from an operating risk perspective. Greater local presence will reduce the risk of contagion, but will likely increase costs and lower operating margins for participants.
©2019 funds europe