An interview with Thomas Richter, CEO of German asset management association BVI.
What major shifts in the investment funds market have occured recently?
The fund industry has become much more important. Just a few years ago, funds were perceived as a financial product for wealthy retail investors. Today, the role of funds as a transmission belt for pension provision is generally known. The fund industry is the largest manager of retirement capital in Germany. People may have access indirectly via insurance companies, pension schemes, employers, etc., but ultimately a large part of social capital is managed in retail funds and Spezialfonds. Particularly in the last ten years, the fund industry has evolved into a separate pillar of the financial industry, alongside banks and insurance companies. And its importance is further increased in times of low interest rates and sustainable investing.
How has the German fund market developed over the last 50 years?
The fund industry in Germany currently manages around €3.4 trillion. In 1970, the figure was DM 10.5 billion. In terms of assets, Germany represents the largest distribution market for funds in the EU with a share of 23%. Some 700 fund companies are active here, ranging from independent fund boutiques to subsidiaries of insurance companies or banks.
What is your membership structure?
BVI represents the interests of the German fund industry at national and international level. We are open to all fund companies and asset managers that manage investment funds or mandates – whether they invest in securities or tangible assets, whether they pursue active or passive strategies, whether they specialize in administration or portfolio management, or whether they target institutional or private investors. We are also open to German branches of foreign fund companies, which currently account for about 40% of the assets managed by all members. We now have 114 members, up from 71 in 2013, which represent 95% of the fund market in terms of assets under management.
‘BVI is convinced that investors should be free to decide whether they want to invest in a sustainable manner or not
What added value does BVI provide members?
We focus exclusively on regulation. We act as the link between the fund industry and the legislator, and facilitate the industry’s decision-making process. We support legislation from political conception to political reality and later its practical application. Regulators and policymakers alike consider us the point of contact to the industry, while our members value our role as competence center for the day-to-day implementation of the relevant legal provisions.
What has been the hottest topic in 2020 in the fund industry?
In times of crisis with volatile markets, robust liquidity management of funds is essential. This was the case after the dotcom bubble burst at the turn of the millennium, during the 2008 financial crisis and now in the coronavirus imbroglio. Portfolio managers must be able to react appropriately to redemption requests to account for the interests of all investors and to protect the market. The German fund industry has proven to be remarkably resilient. Our net new business is comparable with 2018 and 2019 levels, which were outstanding years.
Already long before the coronacrisis we had advocated, successfully, for more flexibility in managing liquidity bottlenecks: swing pricing, redemption periods and gating are now part of the regulatory toolbox. Compared to fund closures as we have seen in the UK, these are less severe measures for dealing with excessive redemption requests.
What are the main EU regulations BVI has advocated?
We pointed out the deficiencies of MiFID II early and unmistakably. The directive was intended to protect consumers, but the result is that they receive excessive product information and less investment advice. MiFID II has clearly overshot its target.
We have also been campaigning for many years to eliminate the flaws in the KID [key information document] of the PRIIPs [packaged retail & insurance-based investment products] regulation. Since 2018, a uniform information sheet has covered the most important features of various investment products such as life insurance or certificates. We like the idea of comparable information on costs and risks of competing investment products. However, the current rules have resulted in erratic and misleading statements on PRIIPs and KIDs, particularly regarding cost and performance. We have successfully argued for a temporary exemption that allows funds to keep using the proven and tested key investor information document for UCITS [undertakings for the collective investment in transferable securities] funds – hopefully until the blatant shortcomings of the regulation are ironed out.
Another crucial EU initiative for us is the Capital Markets Union. We support this project as it is the job of asset managers to bring together the supply of and demand for capital across borders. However, the EU is itself hampering the success of the initiative, particularly through misguided consumer protection via MiFID II and PRIIPs. The compulsory warning notices and advice requirements give investors the impression that securities are toxic. That runs counter to the objective of mobilizing more private capital across borders.
The EU has to think more globally and make the competitiveness of Europe’s financial industry a defined regulatory objective
What are the most important issues facing the industry today?
Retirement provision, sustainability, and the competitiveness of the European asset management sector in a global context are the key issues for the coming years. Investment funds are already indispensable for securing prosperity: they provide for old-age provision on a large sale. We can do even more. But legislators in Germany and the EU need to set the right course. We are therefore calling for a regulatory shift in EU regulation. Excessive regulation ties up huge amounts of resources that could be used for investments in technology and the development of new markets. The EU has to think more globally and make the competitiveness of Europe’s financial industry a defined regulatory objective, in addition to consumer protection and financial market stabilit
What is the BVI position on the EU’s renewed sustainable finance strategy?
We strongly support the basic idea behind of the European Union’s action plan of 2018 to promote sustainable investments. The fund industry has a key role to play on the road to achieving a more sustainable economy, but again, the right course must be set. Firstly, we are convinced that investors should be free to decide whether they want to invest in a sustainable manner or not. Therefore, we regard regulatory measures that stigmatize or prohibit “brown” investments as wrong.
Secondly, asset managers rely on meaningful data on sustainability for their stock selection. Companies worldwide must provide comparable information on their economic activities and their impact on sustainability. This is currently foreseen only for listed EU companies, but asset managers invest globally.
Thirdly, we see the risk that the proposed EU-wide Ecolabel will unnecessarily restrict the investment universe for investors. At date, the thresholds and the exclusion criteria discussed for green investments are too ambitious and restrictive. Let me be absolutely clear here: we are in favor of an European Union-wide Ecolabel, but we need a thorough debate on what would make the Ecolabel compatible with investors’ needs for diversification and returns