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The Brave New World of Corporate Governance in the EU Asset Management Industry

1 June, 2020
New study examines the impact of key regulations, including MiFID II and PRIIPS, on the dynamic relationship between manufacturers and distributors

A new study published by CFA Institute, the global association of investment management professionals, suggests that the asset management industry supports the principle of standardisation of investor information across the EU, but the multitude regulations and directives dealing with product governance and suitability fall short in terms of harmonisation across members states, as well highlighting the challenges and unintended consequences associated with their high levels of complexity.

 

The Brave New World of Product Governance in the EU Asset Management Industry, published today, incorporates the findings of a CFA Institute survey. Members based in Europe were invited to respond to questions on how product governance practices in the asset management industry have changed over time, and the specific effects which major regulatory developments, such as MiFID II and PRIIPs, have had in this respect. The key statistics drawn from the survey are as follows:

  • 69% of respondents agree the Europeans Securities and Markets Authority (ESMA) should be granted more powers to oversee the cross-distribution of investment products across the EU.

  • 51% of respondents think that since the introduction of MiFID II, more care is given to product design and marketing to ensure the right products are reaching their target client base. Notably, 29% think the relationship between manufacturers and distributors presents flaws in terms of investor protection.

  • 54% of respondents think investors obtain enough information, yet they think these investors are probably struggling to understand the information because of its complexity.

  • 57% of respondents think the EU marketing rules are partially effective for the efficient cross-distribution of investment products across the Union. They say partially because standards remain inconsistent across jurisdictions as EU directives are being applied in different ways, geographically as well as between retail and professional clients.

 

Olivier Fines, CFA, Head of Advocacy EMEA at CFA Institute and author of the report, commented:

The headwinds facing the industry include questions of trust, increasing regulation, the value for money proposition, the rise of low-cost passive instruments and the impact of ever sophisticated technologies challenging established business models. We therefore wanted to explore an increasingly important part of the sector’s value chain, how manufacturers and distributors work together for the marketing of investment products. While new product governance rules have investor protection principles at their core, there are clear variations in the quality and harmonization of information provided to investors across Member States and between firms themselves. Further work needs to be done, by regulators and the industry at large, to ensure these frameworks deliver on their promises to encourage the cross-distribution of valuable investment solutions across the EU, a key goal of the Capital Markets Union which aims to resolve the long-term conundrum of pension funding and financing of structural economic projects via the channeling of individuals’ savings.”

 

The key findings from the report suggest that:

  • MiFID II and PRIIPs are perceived to have had a positive impact on the quality of the relationship between manufacturers and distributors of investment products. This is a positive development for investor protection, as it means products are designed with the end-investor in mind and distributors are better able to explain their characteristics before investors make their choices.

  • There is still a problem of consistency in how Member States and firms apply EU directives on investor information and suitability, which does not help investor protection.

  • Respondents supports the principle of standardisation of investor information through the KID, yet criticises its high level of complexity, which may defeat its intended purpose.

  • Cross-border marketing and passporting is perceived to be a positive effect of regulation, yet the lack of harmonisation and local exemptions are making the whole framework more complicated than it is intended to be.

  • Respondents favour further centralisation of supervisory powers with ESMA for the monitoring of marketing practices.

  • Respondents in general agree the PRIIPs KID can be improved, notably by clarifying performance scenarios, reintegrating past performance and clarifying or simplifying the presentation of costs, including the contentious issue of slippage.

  • The situation of outsourcing needs to be analysed since it touches directly upon the very business model of asset management, which is being increasingly strained by rising fixed costs and compressing margins. At the moment, according to respondents, most firms are still choosing to perform internally the operations related to the production of the KID, but this could change with automation over time.

 

About the Survey

The survey was fielded to a representative panel of currently employed CFA charterholders residing in the EU, including the UK. The target population was based on sectors and professions most likely to include people with potential understanding, interest in, and experience with the subject being addressed. The survey was sent on 02 December 2019 and closed on 17 December 2019. Exactly 12,596 individuals received an invitation to participate. Of those, 527 provided useable data, for a total response rate of 5% and a survey completion rate of 94%. The margin of error was +/-4.18%. (See Appendix 1 for a detailed review of the survey’s demographics.)

About CFA Institute

CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organisation is a champion of ethical behaviour in investment markets and a respected source of knowledge in the global financial community. Our aim is to create an environment where investors’ interests come first, markets function at their best, and economies grow. There are more than 170,000 CFA Charterholders worldwide in 162 markets. CFA Institute has nine offices worldwide and there are 158 local member societies. For more information, visit www.cfainstitute.org or follow us on Twitter at @CFAInstitute and on Facebook.com/CFAInstitute.