Capital Market Union – to turn savings from cash to investments.
In a regulatory context, the European growth agenda comes under the 'Capital Markets Union (CMU)' banner. The title can be confusing. The underlying policy imperative is not the operation of the wholesale capital markets per se but about encouraging European citizens to turn more of their savings from cash to investments.
The European institutions – Parliament, Commission, Council – are saying that CMU must move from theory to practice. The Brexit vote does not diminish the need for CMU. In fact, it underlines it: cash savings in continental Europe are high and bank lending remains constrained. Interest rates are persistently low, which may be supporting consumption rather than investment. Yet most countries are now running a current account surplus.
How to move to a more balanced funding model? Can regulatory changes make a real difference? The public statements of the European institutions indicate that they hope so. The investment management industry and its products – collective investment funds – are expected to be at the heart of this campaign. A substantial proportion of the Commission’s CMU work-streams relate to funds.
At the same time, the industry is under closer scrutiny, especially in the areas of conflicts of interest, product disclosures and product design. Policy-makers and consumer representatives are calling for simple, cheaper products. Their focus is on exposing and reducing product complexity and on challenging costs and charges. The types of products that seem to cause most concern and comment are not generally stand-alone UCITS – although some with heavy derivatives use may come under the spotlight. The main commentary concerns bank products and insurance products with funds as the underlying investment components. Opacity of product structure and layering of charges is being questioned.
Will fund investors care much if, for example, the remaining barriers to cross border distribution of funds are tackled? Not unless it leads to materially better performance due to lower charges or greater competition, one suspects. Europe remains very largely a collection of local markets with local cultural preferences and local distributors. Encouraging an investment mind-set requires an understanding and acceptance of market risk. National cultures and regulatory preoccupations with consumer protection may not be the best starting point to promote such understanding.
So, what can or should fund managers do? There is no silver bullet, but change is expected and must be demonstrated. Much of that change relates to firms’ external-facing activities. Regulators seek improved product disclosures. Distributors are being required to ask more questions of product manufacturers. Investors’ trust and confidence must be nurtured. Fund managers need to have constructive responses to these challenges. They are also being challenged to look again at their product range, to explain the risks clearly and to question their pricing structures.
Being at the heart of the economic growth debate brings obligations, but it could also bring significant growth opportunities for the industry. The tone of the industry’s response will be a key ingredient for success.