The competitiveness of Europe’s fund management industry is held back by misinformed regulation and policymakers having little regard for costs, Thomas Richter tells Nick Fitzpatrick. Richters’ vocal stance won him the Funds Europe Personality Award in 2022.
For Thomas Richter, the vocal chief executive of BVI, the German Investment Funds Association, there are too many assumptions made about the funds industry, which fail on closer analysis. For example, it’s not true that Germans are conservative investors, he says.
But this assumption made about German risk appetite is relatively harmless compared to assumptions made by EU lawmakers who craft laws affecting the whole European funds industry. Richter is aghast at the costs this creates.
A regular poll of BVI membership identifies regulation as the biggest challenge for fund management firms “every year, without fail”, says Richter, who is a lawyer by background and member of the administrative council of German financial regulator BaFin.
International competition
A message he wants to send to legislators ahead of the European Parliament elections in June next year is to ‘stop making assumptions’ because their assumptions have impeded industry development so much so that US asset managers thrive globally while European firms, he says, are impeded. He notes the largest asset managers in Europe are, in fact, American.
“I want legislators to consider the competitiveness of Europe’s financial industry, in particular asset management. There are assumptions that form the basis of assessments carried out ahead of new regulations being drafted, and the assumptions are one-sided.”
“I think we have lawmakers who are making laws that solely work against the financial industry, not in favour of it. I do not think they care about costs. They focus on financial market stability and investor protection. Obviously, lawmakers have to protect the consumer. But they should take into account the global competitiveness of the European financial industry, too, when promulgating new rules.”
He takes the current example of the Corporate Sustainability Due Diligence Directive (CSDDD), which is meant to impose due diligence obligations for preventing or mitigating adverse impacts on the environment and human rights upon large companies active in the EU.
Richter says: “It would force European enterprises to supervise that their money does not go into investments that damage the environment or contravene human rights. Fund managers would have to check and control this, but if you are, for example, an investor with a relatively small stake in an Indian corporation, are you really in a position to monitor what that corporation is doing with its workforce or the environment? You are not. But there is a majority in the Parliament in favour of it.”
The CSDDD is currently in the midst of the trilogue negotiations.
He adds that he’s not arguing for deregulation but rather to have a broader view and assessment of financial industry legislation.
“We do not need the level of reporting that we have. No one in Brussels seems to care about costs or to have in mind the competitiveness of European firms. If the central bank wants additional requirements, they will get it, and nobody cares about the costs.”
“It got ideological”
Richter, who has been with the BVI since 2010 (and in 2022 won Funds Europe’s European Personality of the Year award), has met ill-informed assumptions in other spheres. He recounts trying to persuade a German trade union for teachers to support financial education on the national curriculum.
“It got ideological. The teachers’ trade union did not want to teach capitalism in schools!”
With the BVI, Richter has called out the long-running review of investor documents (generally known as the “Priips review”) for being “seriously flawed” – in part due to assumptions used in performance scenarios and cost calculations that could have led to inaccurate information – and not least for the increased amount of reporting that the Priips rules implied for many fund firms.
Lately, Richter, who is a certified trader and analyst, has been at the forefront of a movement to reform market data costs, which are seen as extravagant and prohibitive for fund management firms.
“It got ideological. The teachers’ trade union did not want to teach capitalism in schools!”
“Oligopolies – the index providers and ratings agencies – are putting up their prices every year and becoming a real burden to the industry. For example, asset managers need ESG ratings providers because there is a huge gap in information in that area. Fund managers rely on data from these firms. Those firms know they are indispensable, and managers have no choice but to pay the costs.”
Ultimately, Richter thinks much of the legislation is debilitating to the EU’s aspiration for a capital markets union (CMU), an idea that aims to lower borders between markets and increase capital flows.
Inducement bans “undermine” EU savings plan
Perhaps nowhere are assumptions more thwarted in Richter’s view than in the movement to ban fund commissions paid by investors to sales intermediaries, such as banks and financial advisers.
The BVI’s recent analysis of figures from the European Central Bank and the UK’s Office for National Statistics show that the EU Commission’s key assumptions about the effects of a commission ban are completely wrong, Richter says. With its analysis, BVI “proves” that a ban on inducements does not lead to higher returns for private investors and even prevents them from participating more in capital markets. In the UK and the Netherlands, portfolio returns have not changed due to the ban introduced there about ten years ago.
The BVI paper also shows that private investors in the UK and in the Netherlands actually have saved less in funds due to the ban.
He points to the Netherlands, which introduced retrocession bans in 2014, and where between 2014 and 2022, per capita net inflows for investment funds were just €473 in total per head. “That’s just three dishes with the family in a restaurant,” he says.
The rest of the EU’s average was €2,778 per capita, according to BVI research using official statistics.
The hope of the EC is the commission bans would strengthen capital markets in the EU and increase private retail investments. Their belief is that investors shy away from funds due to high fees.
Latest ESMA data shows that the average fee for an equity fund in The Netherlands is 0.9%. In Germany it is 1.6%, in France 1.9%, and in Italy 2.1%. The EU average is 1.7%.
“Italy, the most expensive market, and where there is not a ban on commissions, has the highest per capita assets in funds and equity, at €30,400. So, the most expansive market in the EU has the higher per capita assets.”
Germany, meanwhile, as one of the markets with the lowest equity fund fees on average in the EU, should have the highest per capita assets in funds and equity, but – at €20,000, Germany falls behind Italy, as does France, with €26,600 average per capita assets in funds and equity.
Richter this “proves that lower costs do not motivate retail investors to invest in funds”.
There’s further data, too. In Germany, private investors held investment funds worth almost €1 trillion at the end of March 2023, according to official statistics. Making Germany the largest private funds market, its AUM corresponds to 27% of the fund holdings of all private households in the EU and the United Kingdom, which in total is €3.6 trillion.
“Italy, the most expensive market, and where there is not a ban on commissions, has the highest per capita assets in funds and equity, at €30,400. So, the most expansive market in the EU has the higher per capita assets.”
The figure puts Germany ahead of Italy (€668 billion) and Spain (€407 billion). These three countries combined account for more than half of private investors’ fund assets.
The UK and France each account for direct fund holdings of around €320 billion. In The Netherlands (8th in the rankings) funds held by private investors account for €104 billion.
Furthermore, BVI research shows that less than half of retail funds sales are made by distributors that are affiliated with an asset manager – again, a finding that could bely an assumption that fund distributors mainly recommend in-house products and might sell funds that do not always fit the investors’ preferences and investment goals. It also means that funds of funds offered by providers with a strong German footprint are a “simple” way for foreign asset managers to access the German market.
Spezialfonds fit for export
In Germany, there exists a peculiar type of fund: the Spezialfonds. Spezialfonds are for institutional investors and account for the largest portion of the German funds market, with €2 trillion of AUM. This is about half of the €4 trillion total and compares to AUM in retail funds of €1.3 trillion (June 2023).
The Spezialfonds is one facet of the German funds industry that Richter says he’d export. They are a real success story, he says.
But as a speciality of the German market, Spezialfonds could be complicated for foreign asset managers. Firms would be unused to the model and less familiar with the tax and accounting procedures, admits Richter.
He points out that 7% of AUM of Spezialfonds is managed in London.
A German myth
BVI’s mid-year fund report shows Spezialfonds investors “held back” on new investments in the first half of the year while retail investors increased their investment.
Is this reticence by institutions a sign of Germans’ conservative attitudes towards investment and their presumed preference for bonds?
Richter acknowledges that pension liabilities restrain institutional risk appetites, but he says equity and real estate quotas are rising, and private equity and private debt are “more and more popular” with them.
For retail investors, it’s a different story. “It is a myth that German investors are conservative. By far, the largest asset class is equity and then balanced funds with 60% in equities. The man on the street would not even know what a bond is!”
At one time, Germany had a huge market in closed-ended funds that invested in office buildings and shipping.
Fifteen years ago, around about half of the global fleet of container ships was owned by German retail investors because closed-ended funds held a tax advantage for investing in shipping.”
A change to tax laws ended this, says Richter. But the perception that Germans are conservative investors is yet another misinformed assumption – one of many in the funds industry, as far as the BVI chief executive is concerned.
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