New European Parliament and European Commission – a new era

Author: | Published: 18 Mar 2015
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Peter De Proft of the European Fund and Asset Management Assocation (EFAMA) reflects on the period of change in Europe, supporting a regulatory pause and discusses where the future focus should be for the European asset management industry

With new mandates for both the European Parliament (EP) and European Commission (EC), 2014 marked an inflexion point in Brussels and the European Union as a whole. It is the beginning of a new phase for the EU.

In June 2014, citizens from all 28 EU Member States decided, with their democratic vote, who would represent them in the European Parliament. 751 Members of the European Parliament (MEPs) were elected. The outcome of the European Parliament elections influences the final composition of the EC. A new Commission President, Jean-Claude Juncker, was appointed, and Commissioner-designates appeared before MEPs in public hearings. The final Commission team was approved by the European Parliament, and began its new mandate on 1 November 2014.

With the new European Parliament and EC, Brussels encounters a period of change, a period of new faces wanting to do things differently, or where things will happen differently. Remarks made by Sir Jonathan Hill, new EU Commissioner for Financial Stability, Financial Services and capital markets union, on social media on 6 November, just six days after taking on his new job, were telling: "We should do smaller number of bigger things better at EU level and stop bigger number of smaller things intruding in national life".

Let us begin with the new European Parliament. The European elections brought a rather significant shift in the political composition of the European Parliament, with far right and far left parties gaining seats. This has never been seen before.

Within the European Parliament, the Economic and Monetary Affairs (ECON) Committee – the key EP Committee for the asset management industry – is now a bigger house. Its size has increased by 27% compared to the previous parliament. In other words, it has grown to 61 full members from the lower number of 48. And around 50%, or 30 out of the 61 Members of the European Parliament in the ECON Committee, are newly elected. Not only are they new to the somewhat complex political Brussels landscape, they are also new to the numerous technical files going through one of the Parliament's most prolific Committees. The chair of the Economic and Monetary Affairs Committee is no longer in the hands of the liberals. Italian Roberto Gualtieri, from the Group of the Progressive Alliance of Socialists and Democrats, will no doubt leave his own imprint on this Committee's work and discussions.

From a political point of view, new political composition means a new balance of power, which will no doubt affect, maybe politicise even further, legislative discussions. What is clear is that we can expect to see dynamics within the EP that have never been seen before to achieve majorities and complicated alliances that are not yet tested. Political analysts explain that there might be two ways to agree in a parliamentary session and secure a majority vote. One would be through a grand coalition of the two main political groups: the Group of the European People's Party/Christian Democrats (EPP) and Group of the Progressive Alliance of Socialists and Democrats (S&D). The second would be through a coalition among the centre-right and the liberals, i.e., four European political parties would need to ally: the Alliance of Liberals and Democrats for Europe (ALDE), Group of the European People's Party/Christian Democrats (EPP), European Conservatives and Reformists Group (ECR), and the Europe of Freedom and Direct Democracy Group (EFDD). It would be unwise to pre-empt how this may function, how politicised technical discussions will become and how Trojan horses might play the game. The challenge has been set.


"The contribution that the fund management industry can have in the financing of the economy and long-term saving is crucial and needs to be encouraged"


The European Parliament, as far as the area of financial services is concerned, has a full agenda for these first months of mandate. But nothing like the last months of the previous mandate, when regulatory frenzies were at its peak. In the asset management arena, a number of key files already feature on Committee agendas, including the Regulation proposed by the European Commission (EC) on Indices used as benchmarks in financial instruments and financial contracts; an EC proposed Regulation establishing a European framework designed for money market funds (MMFs); a draft Regulation on reporting and transparency of securities financing transactions; the proposed Bank structural reform and the draft Directive revising a previous one on the activities and supervision of institutions for occupational retirement provision (IORP II). More work between the European institutions includes the commonly referred to trilogue negotiations between the European Council, the European Parliament and the EC, which will soon begin on the proposed Directive on insurance mediation (known as IMD II).

In the new EC, the Juncker Commission, there are new faces and winds of change. A UK Commissioner for Financial Stability, Financial Services and capital markets union, Sir Jonathan Hill, was an unexpected novelty. Allegedly, a clever one in times of much Euro-scepticism in the UK. In principle, new institutional players bring a renewed thinking on building Europe and setting new priorities for Europe. Many questions hang: who are they?; what are their plans and priorities?; and what will they do?. Now is the time to find out the answers. New ideas have started unfolding on how to build on the single market. The concept of a capital markets union or Commission's investment plan, which was released at the end of November, are two such examples. It is too soon to tell what this will bring concretely, but the feeling is one of change.

With certain caution, EU policymakers speak of a somewhat regulatory pause. The avalanche of regulation in the previous Commission has paved the way for calmer times, and the shift in focus is said to be on:

  • The completion of what was started. A number of legislative files, proposed by the previous Commission, remain under negotiation with the Council and European Parliament and still need to be finally adopted.
  • The appropriate implementation of legislation adopted. In practice this means that the Commission will have to deal with the impressive number of 414 Level 2 measures that flow from adopted legislation (mainly under CRD4, BRRD, and MIFID 2) since the financial crisis. Out of these 414, 177 empowerments are legally due for adoption in 2015.

Our industry agrees with the need for a regulatory pause, which has been acknowledged in higher circles in Brussels. It is important to bed down the regulatory regimes that have been put in place, take stock, and allow them time to work as intended. We also agree that appropriate implementation avoiding gold-plating, consistent enforcement, and appropriate supervision of existing legislation are crucial. And that the cumulative effects of EU regulation should be appropriately assessed. All of these aspects are equally fundamental.

The Commission plans to focus on what they believe matters. The final EC Work Plan was approved on 16 December 2014 and presented at the European Parliament in Strasbourg. With it, the new Commissioner for Financial Stability, Financial Services and capital markets union, unfolded, before the Christmas break, his vision and priorities in financial services.

  • There are key words, in this new era, in everyone's mouths: Europe wants to build a capital markets union. This is a relatively new concept in Brussels that mirrors the single market motto. In 2015, the Commission plans to consult stakeholders about what needs to be done at EU level. Are there remaining barriers to the EU internal market to tackle? How can regulation make markets more efficient? The consultation will launch a debate to seek and unfold ideas around the concept of a capital markets union. After taking stock of stakeholder views, the Commission will decide on its Action Plan, which is expected to be published around summer 2015.
  • More immediate priorities for the new Commission will be proposing a European regulatory framework for the resolution of central clearing counterparties (CCPs) and other non-banks. Commissioner Hill believes a legislative framework in this area needs to be adopted rapidly, given their capacity to be the next Too Big To Fail. Clearly this is a political priority.
  • Simple and transparent high quality securitisation will also be material for EU legislation. The EC hopes a regulatory framework will facilitate investments into high quality securitisation and ensure a fully consistent approach to the treatment of high quality securitisation across sectors.
  • The Commission will also seek views from interested stakeholders on two further key topics: (1) revising the European Supervisory Authorities, with regard to their funding and governance; and (2) on EU actions to improve the current market situation for retail financial services and insurance in the single market. Both are far-reaching enough to open the door to further legislation.
  • We await with anticipation and interest another big plan of the new Commission: the long-overdue assessment of the cumulative impact of regulation. Needless to say, this is a major task requiring considerable efforts and resources. Without this, the new Commission is bound to fall short of its objective of 'better regulation' with a clear risk of proposing regulatory pieces either not fully consistent with each other or which overlap existing requirements, or worst of all, which inadvertently create an un-level playing field among financial sectors.

Growth, saving, and financing the economy

In the new institutional environment, the trend that started in the previous Commission towards growth, long-term savings and long-term financing of European citizens and projects will become increasingly important. The asset management industry is at the heart of this debate.

The European asset management industry stands ready to help understand the particular business model of its industry and the technicalities that go with it, and to constructively engage in the discussions.

Number one challenge: explaining the role of the investment management industry

The asset management industry is the first to acknowledge that it will be crucial to increase understanding and trust in this industry, and address negative perceptions openly and constructively. More efforts will be put into better and clearer explanation of the role and value of our industry, and our distinct business model.

Indeed, the investment management industry plays a vital economic role from which the 'real economy' benefits. And they can provide solutions to the financing gap that exists in Europe.

What is this role?

  • The asset management industry acts as a link between savers and the financing needs of the real economy. Asset managers channel savings of firms and households towards investment in companies, infrastructure projects and public needs. They bring together supply (capital from investors) and demand for that capital from companies and governments.
  • Asset managers act on an agency-based model. They have a legal obligation to act in the best interest of their investors. This fiduciary duty is the backbone of our industry.
  • The limited balance sheet risk assumed by asset managers is based on the fact that they do not provide credit, custody or relevant functions, and they do not use their balance sheets to leverage or to fund day-to-day operations. There is no asset-liability mismatch on asset managers' balance sheet.
  • Clients' assets are protected as they are entrusted to depositaries with responsibilities going beyond safekeeping. Based on regulatory safeguards, investment funds' assets remain out of the reach of the creditors of the asset management firm.

The contribution that the fund management industry can have in the financing of the economy and long-term saving is crucial and needs to be encouraged. It is worth noting some other facts, possibly relatively unknown, on the contribution of the European asset management industry to the European economy.

  • The European investment fund industry is one that is growing at a fast pace. It is much larger today than it was ten years ago, as it has more than doubled in size to reach €93.8 trillion of assets under management at the end of 2013. Demand is there.
  • Europe is the second largest market in the global asset management industry, holding 37% of the market share. The US held a 45% market share at the end of 2013.
  • With over 3,200 companies, the European asset management industry provides 95,000 direct jobs, and 530,000 full time equivalent jobs.
  • The UK is the largest market in Europe, with a market share of 35%, followed by France with 19% and Germany with 10%.
  • European investment funds assets stood at €10.6 trillion at the end of June 2014.
  • The demand for investment funds in Europe increased in 2013 – overall, investment funds domiciled in Europe ended 2013 9% higher. European investment funds attracted €2,420 billion over the last 10 years (2004–2013).
  • The share of cross-border funds in Europe in 2013 stood at 40% of total European investment fund assets, an increase of 13% in the last decade.

More challenges ahead: growth and financing

In the midst of these institutional changes, Europe faces fundamental challenges, including a financing and a pensions' gap. The long-term nature of these challenges mirror the fundamental long-term nature of our industry and, as a result, asset managers have an important part to play to fill both gaps.

In relation to financing, as banks gradually reduce their lending activities and ageing societies look for ways to fund retirement, the asset management industry has an even greater role to play in developing non-bank financing to Europe's businesses. Asset managers are filling the gaps left by the banks safely, and without bailouts. We welcome the potential seen in the asset management industry as part of the solution to the financing gap: by channelling the savings of millions of firms and households to companies and governments into concrete retirement plans and projects, the asset management industry finances a sizeable share of economic activity.

With regard to the savings gap, the EFAMA FactBook, published in 2014, shows that households in Europe park 42% of their financial wealth in bank accounts. The figure for the US is a mere 15%. What stems from this is that Europe has not yet found an optimal way to unlock capital and shift it appropriately towards long-term saving and financing.

When it comes to retirement savings, more can be done, and we need to encourage European households to save more for retirement. To achieve this goal, we believe tax incentives are useful. Our industry is highly supportive of initiatives towards a European single market for personal pension products. We are convinced the creation of such a single market would create the potential for scale economies in the pension market, lower cost and higher return, and therefore stronger demand for pension products. This is why EFAMA proposed in 2013 a European brand of personal pension products: the Officially Certified European Retirement Product (OCERP) for insurance companies, banks, pension funds and asset managers to offer.

A final word of caution is required. An appropriate legal framework can help incentivise long-term savings and investments, but an excessive or too prescriptive one will undoubtedly and unfortunately hamper it.

An overarching theme: financial education

It is widely recognised that many people lack the level of financial education required to decide how much they should save to prepare for retirement and how they should manage their savings and investments. EFAMA's research on investor education highlights Europe's financial literacy crisis, with millions of people struggling to cope with even basic concepts, such as savings and investment (see EFAMA report entitled Building Blocks for Industry Driven Investor Education Initiatives, March 2014).

As responsibility for financial provision increasingly shifts from the state to individuals, urgent action by public administrations seems a must.

The fund industry plays a role in enhancing the quality of financial training of staff and financial intermediaries – brokers, advisers, sales people and others. We believe this will help them enable potential investors to make better-informed investment decisions. This is a contribution to improved investor education that has been welcomed by consumer organisations.

A global debate

Author

Peter De Proft
Director General
The European Fund and Asset Management Association (EFAMA)

47 Rue Montoyer
1000 Brussels, Belgium
T: +32 2 513 39 69
F:+32 2 513 26 43
E: info@efama.org
W: www.efama.org


Many of the issues above are also burning topics being discussed at global level, namely by the Financial Stability Board (FSB) and G20.

The asset management industry is, by its own nature, a global industry, much more so than other sectors. As such, our organisation plays close attention to such global discussions and engages with relevant organisations. EU-US relations are also central to our industry, as are relations with other parts of the global environment, such as Asia and Latin America to name a few.

The International Organisation of Securities Commissions (IOSCO) is an important partner of the FSB in developing a global regulatory architecture and plays a central role in discussions regarding the investment management industry, and EFAMA has been an affiliate member since 2012.

For all of the above, asset managers have a contribution to make in the ongoing and upcoming debates in the European Union. We will continue contributing to the European debate on how to build and strengthen an overall framework to ensure Europe's efficient and attractive investment environment.