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Magazine Issues » September 2021

Luxembourg talking heads: Regulatory responsibilities



Key challenges ahead
The asset management industry feels pressure from different directions. On a geopolitical level, cross-border trade is becoming easier in some areas while restrictions increase in others. Macroeconomically speaking, many developed countries share the biggest issues, from low interest rates – resulting in an increased demand for passive strategies and alternative asset classes – to ageing populations with insufficient retirement savings.

The pensions gap, however, also holds great opportunity for those asset managers who can shine in product innovation and customer attraction. Many new customers belong to a generation that takes mobile investment channels for granted, reminding the industry that the digital transformation isn’t ahead of us, but that we are right in the middle of it.

Will artificial intelligence (AI) calculating NAVs [net asset values] help to reduce the cost of doing business? Will new work models mitigate cost and margin pressures? Our industry must also rise to complex regulatory demands, not least in the growing sector of ESG [environmental, social and governance], but the biggest challenge goes beyond the fund industry: ensuring a liveable future. It is in this endeavour where transparency, innovation, a new generation of investors and strategic thought for sustainability all come together.


Considering market structure
In order to assess the benefits of a single regulator with direct responsibility, we need to consider the structure of the alternative funds market as well as the structure of investorship in such funds.

  • Products: The nature, type and investment purpose of the AIFs can vary broadly within the respective member states. This is essentially driven by the differences in national investment markets, the difference in investor needs and maturity of the AIF space in general. Also, the types of AIF vehicles, the underlying investment strategies and the nature of professional, semi-professional and qualified investors does vary from one member state to the other. Now, this diversity is not to be qualified as an issue, but rather as a benefit. We understand that the respective national specificities are the consequence of particular needs and serve well this purpose. Also, this does not mean that the local AIF markets are unregulated or not harmonised. The AIFMD has regulated the alternative fund managers and defined distinct governance, oversight and safekeeping rules for any investment vehicle qualifying as AIF. Only the funds are themselves subject to national regulations and prudential rules, complementary to the harmonised EU ruleset.
  • Investors: All of these products are only accessible to professional (and alike) investors. These professional investors are themselves subject to harmonised prudential regimes and centralised regulatory oversight (Esma, EBA, EIOPIA) and exposing a very high degree of sophistication and investment knowledge. As such, the main argument for ‘centralising’ a regulator and the investor protection oversight is not as relevant in this market compared to the Ucits market.

So our conclusion based on market observation, investor benefits/needs and existing regulations is that a centralised regulator for AIFs in the EU would not increase investor protection and potentially create oversight issues driven by the very high degree of diversity catering for national specificities (nature, strategies and language of AIFs).

No sign of deceleration
The growth of the asset and wealth management (AWM) industry shows no sign of decelerating, with an influx of investors amounting to a total of US$115 trillion AuM [assets under management] worldwide and US$33 trillion in Europe as of 2020. Though the Covid-19 pandemic has had a lingering effect on the real economy, the AWM industry has shown great resiliency, leaning on the proliferation of low-cost passive products and alternative asset classes as well as the rising interest in ESG investments. External pressures are reshaping the European industry landscape, bringing forth a new set of internal challenges for asset managers.

The concern surrounding over-regulation is rooted in compliance – as asset managers continue to face more stringent regulations, they are having to adapt their business models, creating more costs and uncertainty for their companies. One of the major upcoming regulatory challenges comes from new EU sustainable finance rules (EU Taxonomy, SFDR, MiFID II sustainability preferences) that are set to have a far-reaching impact on the industry.

Economic uncertainty is becoming a major pain point for asset managers. In a post-pandemic environment characterised by unprecedented monetary and fiscal expansionary policies keeping economies and markets up float, asset managers must be prepared for new market conditions. Rising global debt, inflated capital markets, emerging economies struggling to recover, and the threat of rising inflation – just to name a few – will certainly post many challenges for the future of the AWM industry.

Shifting societal values and public awareness of ESG risks have catapulted climate change and sustainability to the top of the global agenda. European policymakers have responded to this call to action, mobilising public and private funds to reorient capital towards long-term sustainable growth. As a result, asset managers are feeling the pressure from investors incorporating sustainability into their mandates to embrace the ESG revolution, which entails repositioning their organisations as ESG inside and out.

Emerging from societal shifts is the concept of double materiality – that asset managers should find a balance between fulfilling investors’ requests to create value while still meeting their expectations to not sacrifice yield in the process. Moving away from metrics that favour short-term performance over long-term environmental and societal impact, asset managers must ramp up their efforts to create transparent and genuine reporting to investors, but also the wider stakeholder universe.

As the passive train gains speed – with global passive assets coming close to US$13 trillion as of 2020 – active asset managers face increased competition to keep their leading position in the market. With passive funds gaining popularity, active asset managers need to clearly convey to investors the added value of active management. Simultaneously, passive asset managers will have to demonstrate their ability to perform during market turmoil.

Digitalisation is not a new trend, though the rate at which it has accelerated throughout the pandemic has surpassed all possible predictions. The need for an agile digitalisation action plan transcends borders and has pushed asset managers to think about how they can leverage digital technologies to thrive in the face of rising competition and disruption. To unlock these opportunities, asset managers must integrate upskilling into the core of their workforce strategies as widescale adoption of automation and technology is poised to challenge the structure of employment.