Unlocking Retail Capital: EU Reform Agenda Comes into Focus at CFA Institute Event

Europe’s capital markets are at a critical inflection point. With more than €11 trillion in household savings largely parked in low-yield, liquid assets, the European Union is pushing to redirect this capital toward more productive, capital market instruments. This ambition of a broad mobilization of retail investors is central in the European Union’s new capital market strategy– rebranded the Savings and Investments Union – and marks a major policy shift aimed at reshaping retail investment across 27 countries. Potentially it could redefine access to risk capital for Europe’s enterprises and create more investable opportunities for global institutional investors.

Against this backdrop, a recent CFA Institute event in Brussels convened EU policymakers, regulators, and industry leaders to explore how these reforms might unlock more efficient markets and generate stronger retirement outcomes. The discussions offered a window into how regulatory change, retail participation, and institutional capital might begin to converge to unlock Europe’s vast household savings potential.

EU financial regulators will need to navigate limited competences, as EU states define important incentives in the tax regime or pension system. Parts of the population with no experience in capital market activities are to be attracted into new instruments such as self-funded pensions or long-term savings and investment accounts. The promise of more meaningful returns, crucially for retirement incomes, will need to be weighed against still limited financial literacy or trust in the industry.

Participants in the June 10 CFA Institute event — hosted jointly with Brussels think tank CEPS — delved into some of these trade-offs and longer term challenges for regulators, EU governments, and the asset management industry. We were glad to hear the latest thinking from EU financial services Commissioner Maria Luís Albuquerque. This offered plenty for an in-depth conversation with our CEO, Marg Franklin, and a subsequent panel discussion, also with Petra Hielkema, chair of the EU’s pension and insurance supervisor, EIOPA.

In a rich and wide-ranging discussion a few points stood out.

• Only once Europe overcomes long-standing barriers and fragmentation in its capital markets will more efficient investments emerge. A lack of investment opportunities, rather than risk aversion, likely explains the relatively conservative allocation of household savings.
• Even though the capital markets agenda was initiated more than 10 years ago, there is an unfinished agenda in EU regulation. Regulators could increase the portability of financial instruments across the EU single market or create a widely-recognized product label for a pension account. In the coming months, the EU Commission will table a revision of the framework for occupational pension accounts and for a common pension product (which have had a very mixed record so far). Greater transparency, for instance through pension dashboards, could bolster incentives as individuals can more easily assess shortfalls in retirement incomes. Consistent regulation and supervision across the 27 EU states should further underpin scale and efficiency of products and a level playing field.
• Capital market deepening will depend on actions taken by the 27 individual EU states. Pension systems relying on redistribution will increasingly come under strain as Europe ages rapidly. An early build-up of a funded pension pillar, including in employer-based funds, can make retirement incomes more secure. Experience with auto-enrolment or pension dashboards suggests individuals can be “nudged” into saving at an early age. Countries such as Sweden that put in place savings incentives now benefit from more secure and adequate retirement incomes. But this is a long-term effort that requires a reliable policy framework.
• Savings and investment accounts that are simple to use can be quite powerful in mobilizing savings. The fiscal costs of tax incentives should be seen in the light of a larger revenue base from investment income and the benefits to local enterprises as capital market funding becomes more accessible.
• Financial literacy will be key in making the capital markets strategy inclusive. Again, this is a long-term effort largely at the level of individual EU states. A wide range of educational establishments and social partners will need to be involved, likely supported by the financial industry as certain marginal groups will need to be protected from fraud and scams.

Key Takeaways

The EU agenda on mobilizing retail savings is not new. Since the first capital markets program was defined 10 years ago, some low-hanging fruit has been delivered. But more vibrant and integrated capital markets have remained elusive. Europe’s markets in fact have shrunk in relative terms, with the global share in equity market capitalization falling from 17% to 11% of the global total between 2008 and 2023.

Investment funds are generally smaller and charge higher costs than in other advanced markets. Tax and other barriers often limit fund distribution to the home country. The EU Commission proposed a Retail Investment Strategy in 2023 to bring down costs and enhance protections for retail investors. The slow and uncertain progress of this strategy underlines that going forward the Commission will need to be more forceful in bringing competition to the single market for savings and investment products.

The urgency of acting now was a running theme at our event. The Draghi report, last year’s widely noted assessment of Europe’s growth weakness, underlined the need for a major mobilization of private investment funds, importantly for funding innovative growth companies. With the recent emergence of geopolitical risk in financial markets, institutional investors have begun to reallocate portfolios to Europe providing an even more powerful impetus for reform. In the words of the Commissioner at our event: the status quo is no longer an option.