By Colin Ng
Continuing with our thinking of CMU & the future of EU Supervision, it’s apparent the creation of a Single Capital Market, brings with it a need to have a single set of rules to govern it. Early last year ESMA launched an Interactive Single Rule Book for the securities market to help market participants understand the Level 1, 2 and 3 rules laid out in order to facilitate consistency in application across the member states.
However, this is not as straightforward as it looks. Whilst a single rule book for all member states is important (and the ESMA will ‘watch’ over it), the EU still has to recognise that a certain degree of national independence is afforded to the member states and its supervisory authority/ies as well.
We observed over the recent years that there has been a steady concentration of power at the ESMA, with some parties crying ‘land grab’ by the EU as a result of the UK’s imminent exit from the bloc. This may also be in part borne out of the growing call from the Commission for ESMA to play a stronger role in enhancing convergence. In a nutshell, this is the convergence dilemma: How much is too much centralisation / concentration?
What does it mean for investors, businesses and the asset management industry?
Historically, retail investors & businesses in the EU have preferred safer investments, i.e. more willing to invest within their national borders and in debt than in equity for fear of less certain returns.
A key objective of the CMU is to increase the range and choice of investments available to investors and businesses. And this is where we see the asset management industry can play a key role.
Armed with years of cross-border investing experience and management expertise, asset managers are able to assume the position as the ‘gel’ that brings together the interest of investors, businesses and new investment opportunities offered by the wider financial markets.
From an investor perspective, by making it easier for small and medium sized enterprises (SMEs) to raise capital on public markets, they have a wider range of investments to choose from leading to a potentially better diversified portfolio. However, these less established firms do come with a higher risk (and also higher expected returns) so acceptance and general take-up will take time.
For SME businesses, this is good news as the ‘promised land’ of public market capital may no longer be a thing for the distant future but something that can be seriously considered in the short to medium term. Having said that, businesses still have to weigh up the pros and cons as high listing fees and initial low take-up may still be deterrents.
CMU proposals are also opening up more avenues for SMEs and infrastructure projects to secure financing through pan European crowd funding platforms and cross-border business angel networks.
What does it mean for product development?
The CMU proposals and legislations to date have offered up new financing avenues and investment opportunities, with the addition of new products, fund vehicles and investment strategies, all geared towards the vision for a border-less capital market in the EU.
The European Long Term Investment Fund (ELTIF) Regulation, which came into force in 2015, created a new AIF cross-border fund vehicle that enables asset managers to offer investment opportunities in SME capital, infrastructure projects and real estate projects within the EU. They essentially have been created to raise funds to channel towards public projects and smaller businesses which historically have had less luck with raising capital.
Having said that, ELTIFs generally offer fewer liquid assets (hence higher returns and more diversification) but is another example of how the CMU have created different investment strategies.
Another important theme arising from the CMU proposals is the alignment with improving the market’s understanding of environmental, social and governance related risks and returns (responsible investing). It seeks to provide opportunities to connect capital with greener and sustainable infrastructure projects and SME businesses.
Another important measure from the CMU proposals is to promote retail savings and investment through capital markets via the creation of a pan-European Personal Pension Product (PEPP).
The introduction of PEPP has increased choice for retirement savings and builds an EU market for personal private pensions which pension providers could opt for when offering private pensions across the EU. Importantly also, it helps to channel EU savings to much needed long-term infrastructure investments.
Four years on, we observe that take-up has been relatively low with only a couple of Italian fund houses having set them up (Muzinich & Cordusio SIM, and Eurizon). The right incentives have to be looked at, and there is still work to be done to local level tax laws to remove any cross-border obstacles. Also, consideration needs to be given towards a more suitably calibrated calculation of the regulatory capital that institutional investors should hold against infrastructure investments.
With new products and investment strategies, comes the need for enhanced promotion of financial education and setting up a market infrastructure to improve financial regulation and market efficiency. Though take-up is relatively low at the moment with ELTIFs and PEPP, we see this is as expected as it requires a cultural shift. Rome was not built in a day.
What does this all mean and what is left to do?
Careful expectation management is important here. The Juncker Plan is ambitious, and the CMU is not any different. Capital markets are still fairly diverse and for all EU28 states (maybe 27 in a few months) to fully embrace the changes and lower their national barriers, less political hustling and more results need to surface (which also begs the question of how we can concretely measure its success). All member states need to accelerate discussions of the remaining proposals with a common goal in mind; much-needed lasting reform of the European financial markets.
The recent European elections will bring a new Parliament into Brussels. It remains to be seen what future impact this new Parliament will have on the outstanding CMU work. However, with economic short-termism, nationalism and populist politics on the rise in recent years, now is the time more than ever for initiatives such as the CMU to deepen the unity of the EU.
This article originally appeared on the AlgoMe Consulting web site
Authored by Colin Ng and Pierre-Yves Rahari
By Pierre-Yves Rahari
Juncker once famously said “Borders are the worst invention ever made by politicians”.
Since taking up office in 2014, his Commission has been addressing exactly that: Remove obstacles for sustained improvement to the economy which will benefit the European people, regardless of where they are located. This is embodied in Juncker’s ambitious Investment Plan for Europe.
Five years on from the conception of Juncker’s Plan, it has been reported that EU GDP is up by 0. 6%, it is set to create 1.4 million jobs by 2020 and has helped to mobilise billions in private investment for the public good (exceeding original target of €315 billion).
These are not modest statistics – Juncker’s Plan is showing results and have laid down the foundations for further growth in the future. But there is still much to do.
A key ingredient in Juncker’s Plan is the Capital Markets Union (CMU). Since 2014, EU press have been dominated by a blizzard of challenging news; the monumental bailout of the Greek economy, a migration crisis and more recently, the UK’s Brexit referendum result so it is no wonder the CMU has had modest publicity to date. But it is an important Single Market project and one of the key pillars of Juncker’s Plan.
Essentially, the CMU’s key objective is to improve the free flow of investment all across Europe by providing the infrastructure to encourage people and companies to look across their national borders for investment opportunities and capital to benefit its people, businesses and infrastructure.
The CMU & the future of EU Supervision
Refreshingly, the CMU is not another stand-alone piece of regulation or legislation that adds to the mounting compliance burden that most European firms are already grappling with. Instead, the CMU is an umbrella for 23 separate but complementary proposals; a few of which have been adopted into legislation so far.
In its essence, most of the proposals formed under the CMU umbrella is to move the European economy in one direction; To rejuvenate investments and deepen its integration by harmonising national regulation, legislation and supervision, and breaking down obstacles to cross-border investments.
As with any growth programmes, ensuring that proper safeguards are in place is crucial to ensure lasting and sustained results, whilst protecting all parties involved. To be fair, major European regulations introduced in recent years such as MiFID II (and also those about to be enforced e.g. PRIIPS) are playing a part in this vision for Europe by enhancing investor protection, increasing transparency and improving market efficiency to bring the confidence back into the European investments market. Though it may seem that the list of new regulation is ever increasing, we see that the themes and ambition are very much aligned.
With respect to supervision, removing national obstacles to cross-border investment and flow of money has accelerated the call for supervisory and regulatory convergence in the EU. This is particularly important in the area of funds distribution to encourage more cross border investments and support the creation of a Single Capital Market.
Perhaps, another argument for more commonality in supervisory principles, outcomes and culture is that one must also consider that breaking down national barriers may come with risks to the financial stability of the bloc. National crises will no longer be contained in the scenario of a true Single Market; the European Union will truly be operating as one. Enhanced convergence in supervision will help to address this new systemic risk and has been a strategic priority of the CMU proposals.
This article originally appeared on the AlgoMe Consulting web site.
Authored by @Pierre-YvesRahari and @ColinNg
Understanding your state of readiness for SMCR extension - City HR
CITY-HR.CO.UK Assessing your readiness for the SMCR extension Aimed at firms embarking on SMCR, or those in scope who would like latest thinking, this programme will: Provide an SMCR overview with expert insight direct...
By Rob Carter
The UK is a hotbed of fintech activity, and it has not escaped the attention of investors worldwide. so what can we expect in 2018?
Last year, almost £3bn of venture capital found its way in to the UK’s tech sector, a record high and nearly double the figure for 2016. British fintech firms attracted almost four times more funding in 2017 than Germany, and more than France, Ireland and Sweden put together. This year promises to be even bigger, but what are the exciting developments driving those investment flows?
Here’s what to expect in 2018 across five key areas we’ve identified:
One of the most exciting developments to land in the UK financial sector is Open Banking. Under these new rules, which came in to force in January this year, banks must share their customers’ financial data with other FCA-authorised institutions, if customers request them to. This includes bank and credit card transactions and information about spending habits, for example. The aim is to improve competition in the marketplace and ultimately help consumers get a better deal. It should also foster much greater innovation, as new alliances are forged between traditional financial services firms and fintech startups. This is already starting to happen – First Direct has partnered with fintech firm Bud, Barclays is working with Flux, and NatWest has teamed up with FreeAgent. Banks are working hard in-house too: HSBC, for example, has launched a beta app which will allow customers to see all their accounts on one screen, even those from rival providers. Expect more innovation and unlikely partnerships in the banking sector this year.
Wealthtech refers to the specific type of fintech which is used to solve problems and improve user experience in the wealth management and investing world. The definition includes robo-advisers like Nutmeg and Wealthify, as well as micro-investment services and digital brokers. They focus on the under-served mass market of people who would like to invest but only have small savings pots to play with, or who perhaps can’t afford financial advice or wouldn’t be economically viable clients for traditional financial advisers to take on. Robo-advice and micro-investing tools help to democratise investing and make it accessible to a much wider consumer base. Although some of these companies may take time to become profitable, the assets they manage are set to grow rapidly. Deloitte estimates the $2 billion in assets under automated management globally today may grow to as much as $7 trillion by the year 2025.
So strong has been the hype around cryptocurrencies that some listed companies in totally unrelated sectors have linked themselves to the space by changing their names or the focus of their businesses. Just adding the word ‘blockchain’ in somewhere has proven enough to send their share prices soaring (see Long Island Iced Tea Corp, now called Long Blockchain). But there may already be signs that the bubble could burst – highly volatile Bitcoin has fallen a long way from its lofty highs, and there is a regulatory threat from financial watchdogs globally following a crackdown by South Korea. There could be interesting developments to come in cryptocurrencies this year as companies navigate the new landscape.
Regtech refers to the use of technology to help financial services firms better comply with regulation. It’s been dubbed ‘the new fintech’ and it is a fast-growing area. Regtech businesses help other firms to meeting their reporting and compliance obligations, monitor transactions, and manage risk. Firms like Funds-Axis, DueDil, and Silverfinch are part of this growing movement. Deloitte says: “RegTech has a very bright future, with a huge amount of opportunity for those developing this type of technology to automate and enable the world of regulatory assessment and control management, bringing clarity and control to an area of the business that is so incredibly important, but so often cumbersome and time-consuming.” With the Financial Services industry under more regulatory pressure than ever and drowning in legislation, Regtech should be a fascinating area to watch.
When you think of AI, you might think of chatbots being used to replace customer service people, or voice command technology like Amazon Alexa. But the applications of AI in fintech go much further. It can be used to spot suspicious transactions and cybersecurity threats, or predict consumer behaviour and make more accurate predictions based on these insights – for example, whether someone will be a future credit risk. Machine learning can be used to create a customised investment portfolio based on someone’s personal interests and preferences, updating it as their preferences change over time. The possibilities are endless, and who knows how the FS industry could change when AI reaches its full potential?
As always, only time will tell when it comes to forecasting the future but one thing is sure, the UK fintech market is thriving now and will continue do so for a long time.
By Rob Carter
It’s 2017 and technology surrounds us as never before. Asset Managers are investing a lot of time and money to get to grips with both FinTech and the new kid on the block RegTech. At AlgoMe we’re fascinated by the way technology is changing the world of work and skills. We’ve put together some key technology themes which we think will be big this year and what to watch out for too.
Big data analytics
Big data is creating a buzz across the business world and is one of the most important challenges and opportunities facing financial businesses today. IDC, the global market research, analysis and advisory firm, predicts that the big data and business analytics market will grow from $130 billion to $203 billion by 2020. The problem is, firms collect swathes of customer data, but without the tools to mine these so-called ‘data lakes’ correctly, they are not getting analytics they can develop actionable insight from. Done correctly, it’s immensely valuable and more than just analysing customer behaviour – analytics can be used to predict the regulatory and operational risks the firm itself could face. For example, using technology to analyse the root cause of any previous regulatory breaches could prevent the same mistakes from recurring in future. The FCA has acknowledged that it too could use big data analytics to reduce the reporting burden on firms. Last year it launched the Regulatory Sandbox to help firms innovate and this has already produced some interesting results in the world of banking technology. Some companies are launching Data Analytics as a Service for the Asset Management industry and the knock on effect will be a demand for professionals with new skill sets to embrace this new opportunity.
No doubt you’ve probably heard of robo-advice, but there are also other ways that machine learning can be applied in financial services. Possibly the most disruptive of technologies to break into the financial services space, you should expect to hear more about machine learning and robo-advice (with a soupçon of AI thrown in) this year.
Just last month LendingRobot, a specialist online investment-management service or so-called “robo-advisor,” announced its launch of a hedge fund which is administered without human intervention. Silicon Valley has also woken up to the opportunities and companies like Sentient Technologies will be grabbing headlines this year.
P2P platforms and other lenders use algorithms to make lending decisions and predict bad loans. There are also firms which use machine learning to scour social media and news sites for trends to give their clients signals to trade on. The FCA has noted that because machine learning can automatically refine processes in reaction to user input, they could replace some of the complex, high volume tasks firm need to perform to remain compliant.
For now, there’s no need to grab your coat and head for the door; technology hasn’t taken over quite yet! However, understanding how these trends will impact your business area will be essential in the coming months.
Cybersecurity and fraud prevention
With MiFID II a big headline for 2017, the need to adopt new technology to support compliance has never been more apparent. The regulatory burden for Asset Managers can be lightened by RegTech as it can be used effectively to monitor transactions, trades and communication in real time, all the time. By correlating information gathered from different sources, powerful calculation engines can highlight errors, gaps and current trends in financial crime to help firms shore up their defences. With financial institutions a regular target for hi-tech cyber criminals, fighting fire with fire has never been more important. We expect this area to become more central to the industry in the short term.
The Asset Management industry suffers no shortage of data but it is faced with management and automation challenges. Organisations are increasingly looking towards technology in their operating models to simplify administration and, where possible, to reduce the costs associated with fund managers doing things manually. It’s a great way to reduce the pressures on margins and increase overall performance.
In 2017, you can expect to see a lot more companies like CG Asset Management adopt automation. Performance reporting, regulatory reporting, investor communications and fund expense management are key pressure points for companies struggling to move away from the legacy systems they have always used or for those who have bought pick and mix technologies that will not integrate seamlessly.
This is a major investment for an organisation and a positive direction for the wider industry to move towards – it will also mean bringing your teams up to speed with new platforms and technologies very swiftly.