CFA Institute EMEA Membership Survey: Effects of MiFID II and PRIIPs on product governance in the EU asset management industry

The brand new world of product governance in the EU asset management industry

CFA Institute has launched a report The Brave New World of Product Governance in the EU Asset Management Industry. CFA Institute surveyed European members on product governance practices over time and the specific effects major regulatory developments like MiFID II and PRIIPs have had in this respect.

Asset management is, yet again, at a crossroads. According to BCG’s latest Global Asset Management report (2019), total assets managed by the industry will have risen from USD31 trillion in 2003 to USD74 trillion in 2018 and USD101 trillion expected in 2023. In the meantime, the share of passive management also has risen from 9% to an expected level of 23% in 2023, all at the expense of traditional active strategies.

Traditional asset management’s business model has been assailed by a crisis of trust because of the 2008–2009 financial crisis, compressing margins as fixed costs have been rising on the back of increasing regulatory pressure. The rise of low-cost passive instruments has been helped by a technological revolution that has made personal investments as easy and disintermediated as ever. A growing appetite for expansionary monetary policy and, let’s face it, quantitative easing has been gradually eroding active management’s capacity to distinguish its strategies. Thus, it is no surprise that the value chain of asset management has also gradually shifted.

Asset management’s value chain involves a variety of operational steps, ranging from designing a product to selling it, with each step adding a bit of value to the overall economic value added or the activity’s profit. This value chain has gradually shifted away from traditional production (the management engine) in favor of distribution. As this shift took place and the focus on costs caught everyone’s attention, EU regulators became interested in the overall duty of care (short of calling it fiduciary duty) of the combined machinery made up of the manufacturer of these products and the entities in charge of marketing them to the end-investors.

We have focused our research precisely on the nature of this relationship between EU manufacturers and distributors of investment products, which has changed over time and also most recently under the pressure of regulatory developments, such as the Markets in Financial Instruments Directive (MiFID II) and Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation. Ultimately, the question asked is whether the current process permits the creation of valuable products, at competitive prices, and distributed to end-investors with sufficient transparency and meaningful information. Overall, regulators are interested in encouraging a system in which investors can make informed decisions that will have an impact on their long-term savings and financial security.

To examine these issues, CFA Institute conducted a survey of its members on product governance practices over time. The survey was fielded to a representative panel of currently employed CFA® charterholders residing in the EU, including the United Kingdom. The survey was sent on 2 December 2019 and closed on 17 December 2019. A total of 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% (margin of error: +/-4.18%).

The key ideas developed in this study are as follows:

• MiFID II and PRIIP regulations are perceived to have had a positive impact on the quality of the relationship between manufacturers and distributors of investment products.

• A problem of consistency persists in how the Member States and firms apply EU directives on investor information and suitability, which does not help investor protection.

• Respondents support the principle of standardization of investor information through the key information document (KID), yet criticized 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 harmonization and local exemptions are making the whole framework more complicated than intended.

• Respondents favor further centralization of supervisory powers with the European Securities and Markets Authority (ESMA) to monitor marketing practices.

• Respondents agree that 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 analyzed as well 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, 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.

Image Credit @ Getty Images/ Maskot