Embracing the future cannot materialize without an appreciation of both the present circumstance and historic precedent. Consideration of previously identified risks and managing expectations for the future both play a major role in decisions made today.

And as the world continues to deal with an unprecedented period of global pandemics, heightened geopolitical as well as supply chain and inflationary risks, it appears that the financial global markets continue to grow in scale and strength. The global asset management industry has been a major beneficiary of this wider market growth which has sustained throughout the pandemic period. Global assets under management have already passed the US$100 trillion mark and according to PwC¹ will rise to US$145.4 trillion by 2025.

Within the European Union, however, there is widespread recognition that its capital markets are mature but not as large or as vibrant as perhaps they could and should be when compared to other major economic blocs.

EU Capital Markets Union 2.0

Despite buoyant markets and record inflows, global asset managers entering 2022 face significant headwinds such as market uncertainty, regulatory scrutiny, rapid technological advancements, fee compression and constrained returns in a zero-interest rate environment. As such, any large-scale strategic growth plan should be welcomed, which is why the revamped EU Capital Markets Union (CMU) Action Plan has drawn much interest.

The ambitious Action Plan aims to create a single market for the flow of capital across the EU to design an even safer place for individuals – both professional and retail investors – to save and invest long-term. There may be anti-climactic groans from some at the mention of CMU, considering prior attempts fell short of their stated goals, however there is a growing sense of optimism around CMU 2.0 which suggests that this time might be different.

A lot has changed since the original CMU project was launched back in 2015. The Brexit vote had not yet happened, the Paris climate agreement was yet to be signed and the fintech and digitization phenomenon was only beginning. Fast forward to today, however, the European Commission states that the development of the EU’s financial markets is key to its ambition to finance a green pandemic recovery and central to the digital transformation of the EU. In addition, the EU must attempt to plug a Brexit sized hole in its capital markets following the exit of (by far) its largest previous member. Environmental, social and governance (ESG) initiatives such as the Sustainable Finance Disclosure Regulation (SFDR), the Corporate Sustainability Reporting Directive and EU Taxonomy, as well as a Digital Finance package and a strategy for retail investors, will each have a sizeable impact on the future of the financial participants within the EU and beyond.

Sustainable Finance Package

The European Commission’s sustainable finance package is already influencing and shaking the global asset management market today. In 2021, the European Commission adopted an ambitious and comprehensive package of measures to help improve the flow of money towards sustainable activities across the European Union. Both retail and institutional investor demand continues to rise for ESG conscious investments and EU regulators are therefore adopting new measures and legislation to help the financial industry meet that demand. An ESG strategy is no longer a “nice to have” but a “must have” for asset managers.

The SFDR sets rules for mandatory disclosure and transparency requirements in the form of website, pre-contractual, and subsequent periodic accounts disclosures. To meet these new requirements, the asset management community needs to review its overall strategy and include sustainability goals, adapt its products to the ESG requirements and start collecting new sets of ESG data. The last bit, as we know, presents a challenge of its own. The integration of ESG into asset management business models is the classic case of a great challenge but also a great opportunity. What is certain is that ESG is no longer a voluntary activity or niche product, but rather a crucial component of any asset manager’s armory.

Digital Finance Package

The Digital finance package² is another bold initiative of the EU. This strategy sets out general guidelines on how Europe can support the digital transformation of finance in the coming years, while regulating its risks. It contains broad ranging policy actions ranging from the establishment of a Digital Euro to crowdfunding regulations. It looks to foster proportionate laws and regulations which might aid the uptake of new technologies such as blockchain, artificial intelligence and cloud services in the financial sector.

The balance between fostering growth and innovation and continuing to protect consumers and preserve financial stability is the needle which the EU needs to carefully thread. So a complimentary initiative within the EU’s grand design is the Digital Services Act package³ which marks one of the most globally ambitious attempts to “police the internet”. The proposed act targets Google, Twitter and Facebook in terms of content moderation, targeted advertising and user data acquisition. The policy’s remit evidences the scale and level of ambition of EU’s policy agenda as it looks to provide appropriate road markings for the inevitable journey into full digital economies.

The package proposes rules and regulations for a multitude of contemporary technology related areas including the digital assets ecosystem in the form of Markets in Crypto-assets (MiCa)⁴, Digital Operational Resilience Act (DORA)⁵, and introduces the prospect of an ECB-issued digital Euro and the possibilities of building market infrastructures on distributed ledgers. The package is heavily driven by the fact that innovation, often driven by the FinTech community which usually resides just beyond the EU’s formal regulatory perimeter, takes a digital form, and promises many benefits to the investors and Capital Markets itself.

Digital technologies and applications built on modern technologies have a potential to provide safer and more reliable services, while reducing costs for both industry and investors. Furthermore, data is becoming a key asset for innovation along with IT infrastructure and therefore, global asset managers must invest into these fields to stay relevant. The execution of the EU’s overall CMU strategy is expected to occur over the next five years but action on each of these items by asset managers is needed now.

Finally, the European Commission is also preparing a retail investment strategy. It intends to look for ways to increase participation by EU investors in financial products like mutual funds which is shown to lag other regions in terms of participation. There is widespread recognition that for too long European investors have left their savings in bank accounts and made disproportionately conservative financial decisions which ultimately would aid their longer term saving and retirement needs.

At its core, CMU is about “growing the pie”, which benefits the asset management industry. The European Commission is seeking to ensure that a legal framework for retail investments is suitably adapted to the profile and needs of retail investors, further empowers and protects them to invest, and enhances their participation in the capital markets in a fair representation. The EU wants to see retail investors as a sector to grow, as they currently make up only about 28% of the EU asset management clients base by AuM value.⁶ The share of retail clients, who are mainly household investors and high net worth individuals (HNWI), in the capital markets is diminishing, despite the good performance of the stock and bond markets and ultra-low interest rates offered on bank deposits.

For more information on this and other regulatory topics, please download our Regulatory Field Guide 2022.