BVI CEO Richter on why AI and big data will bring about major change in the fund industry

Thomas Richter, CEO of the German Investment Funds Association (BVI), outlines the reasons behind the German market’s resilience, as well as the growth drivers and risks going into 2024. He also addresses competitiveness, sustainability and technological innovation.

Despite macroeconomic challenges in 2023, the German funds industry has shown resilience and growth. Can you provide insights into the main drivers?

The main drivers are savings plans and the so-called Spezialfonds. In Germany, an estimated 50 million private investors invest their money in funds, either directly via retail funds or indirectly by paying contributions into life insurance policies or occupational pension schemes. Insurers, pension funds and other pension providers are institutional investors who invest a significant portion of the contributions received in Spezialfonds. Because of continuous investments by institutional investors and private investors’ savings plans, Germany is, according to the ECB, by far the largest fund market in the EU, with assets of €3.4 trillion. This represents 28% of the fund assets of private and institutional investors in the EU (€12.4 trillion), followed by France (15%), the Netherlands and Italy (9%).

What is the outlook for the German funds industry in 2024?

The outlook remains quite positive. According to our latest survey, fund companies in Germany continue to assess their economic situation and their business expectations for the next twelve months as positive, even though BVI’s market barometer has dipped slightly. It is remarkable that the firms hardly see any clear drivers for further growth. The highest score was achieved by sustainability with 50% and old-age provision with 46%. The main risks are a possible general economic crisis and a high regulatory burden with 70%. It needs to be added that the sentiment for ESG investing has significantly changed since we conducted the survey.

In a statement released by BVI in September 2023 regarding the sustainability preference of investors in the German market, you concluded that they are “over-challenged by the regulatory concept of sustainable preferences.” Can you elaborate on these initial findings, and discuss their potential remedies?

Market soundings indicate that only 10% to 20% of private investors confirm such preferences. The vast majority of them refrain from further specifying their preferences. Obviously, investors are currently struggling to understand the regulatory concepts and are frustrated by the lack of universally applicable standards for sustainable products that could match their preferences. We encourage ESAs to make the integration of sustainable preferences in the suitability test more practicable, i.e. to refrain from asking investors about their preferences for product features that are not available in the market, such as preferences for high proportions of taxonomy-oriented investments. It should also be allowed for clients’ sustainability preferences to be explored in terms that are more general without having to set preferences for minimum proportions of these investments.

European fund managers have long criticised the European Commission for pushing excessive rules that harm the industry’s competitiveness. As a response, it introduced a standard competitiveness check for regulations in 2022. Can you share your thoughts on this?

For some years we’ve been calling for a rethink to make financial market regulation better and more balanced. Up to now, the EU has based its financial market regulation solely on the objectives of financial market stability and consumer protection. These are important objectives but they are not the only ones. Location policy and economic concerns should also be included in regulatory decision-making. This the US way. The US regulation also addresses the important objectives of consumer protection and financial market stability, but it keeps an eye on the interests of the local financial industry – with visible success. US asset managers have been growing faster than their European counterparts for years and the same applies to banks. The European fund industry faces global competition. No market can isolate itself. Against the backdrop of increasing pressure on margins, European asset managers need to focus on their global competitiveness.

What other regulatory changes do you believe would enable European fund managers to be more competitive on the global stage?

The EU should reduce the excessive detail of regulation. Compared to 2010, the minutiae of regulation from Brussels dominate our day-to-day business today. Almost weekly, ESAs publish hundreds of pages of technical regulatory standards, guidelines and recommendations. ESMA, EBA and EIOPA are much more than just supervisory authorities; they are a kind of shadow legislator. This growth in power was a response from the EU to the financial crisis but it has increasingly taken on a life of its own. The EU has to finally ask itself whether consumers and regulators have been waiting for the sixth or seventh reporting standard, for example, and whether this reporting really adds value while creating, at the same time, excessive costs on the industry side. Overall, implementation of the many detailed EU rules burdens the fund industry with high costs. That money is then not available, for example, for further digitisation or entering into other markets.

In terms of technological advancements, AI co-pilots, specifically Generative AI and Large Language Models, are disrupting industries across the board. Do you see them having an important role in the funds industry?

The fund industry will see a major change due to AI, big data, etc. However, to apply the technologies to asset management, numerous legal aspects need to be clarified. For example, the use of innovative technology must be compatible with supervisory law. On the other hand, supervisory law should be checked to see whether it prevents useful innovations that serve investors and the market. With regard to the use of alternative data, a reform of copyright and competition law is necessary to establish a level playing field between data users and data providers in the digital economy.

Finally, looking ahead, what are the BVI’s priorities?

We have already addressed two of the BVI’s top issues: competitiveness and sustainability. Another issue is commission-based investment advice. While the European Commission has refrained from a full ban on provisions for the time being, a ban has not been taken off the table yet. We think that this would run counter to the Commission’s objectives of increasing retail participation in capital markets. Another important topic deals with financial market data. The financial industry’s spending on market data has been rising for decades. Ultimately, the end investor bears the cost increase. The BVI is campaigning for the cost-effective procurement of data. Finally, we are pushing for a private pension reform in Germany. The Focus Group on Private Pensions, set up by the Federal Government, recommends specific measures to make private old-age provisions more attractive, including losing guarantee requirements on savings contributions and allowing for more flexibility during the payout phase. Furthermore, the Focus Group recommends not pursuing the idea of a public-sector fund in the third pillar. Now, these recommendations have to be put into law.

This interview first appeared in the October edition of GOLD magazine. Click here to view it.