Welcome to the podcast that shares the views of high-level leaders in the European and global financial services industry.

. – Welcome to Shaping Finance, a podcast which offers a platform to high – level decision makers and shapers in international finance. My name is Nicolas Mackel. I’m the CEO of Luxembourg for Finance and the host of this podcast.

Today, I have the privilege of welcoming Tanguy van de Werve on our podcast. Tanguy is the Director General of the European Fund and Asset Management Association, or EFAMA. Tanguy will tell us more about what EFAMA is and does, in a minute. Tanguy joined EFAMA in December 2018, following a career in leading roles in banking, asset management and capital markets, as well as industry interest representation. And this is also something which he shares his expertise on by teaching at the highly regarded College of Europe, in Bruges. Welcome to Shaping Finance, Tanguy.

Tanguy van de Werve. – “Thank you Nicolas, for having me.

So, maybe perhaps to start off, can you explain to us what EFAMA is and what its role is both in the European and in the global asset management space?

“Sure. No, thank you, Nicolas. EFAMA is the European Fund and Asset Management Association. We are the voice of the European investment management industry at both European and international level. Our members are national associations. We have 28 of them, including of course ALFI, but also the Swiss and the UK associations. And we have 59 corporate members. We also have associate members and those are companies which are serving our industry, such as law firms, consultants, and a number of asset servicing companies.

We are based in Brussels at the heart of the EU and have 19 members of staff. And really, as a trade association, our role is really to promote the interests of our members and raise awareness of the importance of the solutions and the services they provide. We were established in 1974 and since the very beginning, we have been fully supportive of the EU project and have been working towards helping the EU achieve its objectives, whether in terms of single market, consumer protection and more recently, Capital Markets Union and sustainable finance.

We engage with European and international regulators and standard setters on a wide range of topics relevant to our industry. And this engagement, this advocacy, is based on evidence-based positions, which we developed then with the help and the expertise of our members. And finally, we also collect industry data and carry out research activities to support our advocacy efforts.

Thank you. Now, the asset management industry certainly is a major force in helping to finance economic activity. How can we in the post-COVID world make sure that the contribution of the asset management sector can help maximise the economic recovery?

“Our industry is indeed ideally placed to contribute to this European recovery post-COVID. And this is so because it already benefits from a very robust regulatory framework that allows asset managers to channel savings into productive investments in the interest of our clients. Now, to support this recovery, it is very important for asset managers to operate within regulatory frameworks that are stable. And the AIFMD and the UCITS directives are really cases in point here, they have become, over the years, international gold standards and have proven their effectiveness. Their upcoming reviews by the commission should therefore be evidence-based and very carefully targeted. A light touch will be required here.

Now that being said, a number of new measures would indeed further facilitate the deployment of capital into the economy. I think here, especially of the ELTIFs, the European Long-Term Investment Funds. Few ELTIFs have been launched since the ELTIF regulation was adopted some time ago, although take-up has increased in the past few months, which is promising. Now, the ongoing review of the ELTIF regulation is a fantastic opportunity to amend the framework, ensure it delivers on its objective of facilitating investments in longer-term assets, such as transport and social infrastructure projects, but also real estate and SMEs.

And it is also an opportunity to get more retail investors, to invest in such investment vehicles, by changing a number of ill-suited requirements. And more generally, Nicolas, any measures that aim at creating a genuine Capital Markets Union, at unleashing the full potential of sustainable finance, would contribute to the post-COVID green recovery and enable our industry to play its part. And finally, looking at the many legislative initiatives in the pipeline of the commission, it will be critical to consider the impact that the envisaged rules are likely to have on the competitiveness of the European financial services industry. And this is because a thriving financial services sector is key to the success of any recovery plan. And this dimension we feel, is too often ignored by European policy makers.

You have mentioned the green recovery, and if one of the positive lessons of COVID is the acceleration of everything that is related to sustainable finance. And in the asset management industry in particular, I think one of the very positive elements is to see how asset managers have really unequivocally embraced sustainable investing. What was then the reasoning behind EFAMA’s recent call for a transition period or a delay in the implementation of the Sustainable Finance Disclosure Regulation? And what are the major issues that still need to be addressed in the area of sustainable finance for the asset management industry?

“Thank you Nicolas, for asking me this question, as it gives me really the opportunity to clarify things. But let’s be clear, our industry is absolutely committed to the objectives of the EU Green Deal and of the Sustainable Finance Action Plan of the European Commission. At EFAMA, we very much see our role as helping the EU achieve these objectives by developing a regulatory framework that is workable. Now, the moment we feel that for reasons outside our control, we will not be able to comply with whatever new requirement is being considered, it is our duty to flag that to the commission. There is absolutely no point in accepting something which you know in advance will not work. You are not doing anyone any favor by remaining silent. It is precisely because we care, that we need to voice such concerns. In the case you mentioned, we are not calling for a delay of the entire SFDR Level Two measures, not at all.

Our call for more time only concerns the taxonomy-related amendments to the technical standards and it’s justified by the fact that substantial changes will be made in October, in October this year, and it will not be possible to update all our templates and the systems in just a few weeks, that is by the deadline of the 1st of January 2022. So, our ask for more time is further justified by the fact that investee companies, the companies in which we invest, will not be obliged to disclose the percentage of their taxonomy-aligned activities before 2023. So, we would anyway not be able to disclose that information as of the 1st of January next year. And frankly, as the commission has repeatedly said, pragmatic solutions will be needed to address the implementation issues faced by the industry and resulting from the poor sequencing or inappropriate timing of many of the pieces of the sustainable finance regulatory jigsaw. This is the case here, and we feel that we are being pragmatic.

As for your question about the major issues that still need to be addressed in the area of sustainable finance, I would say that by far the biggest one is access to data. We, as an industry, we are committed to play our part in channeling savings into green investments, in holding investee companies to account for their ESG footprint and also improving our own ESG reporting. But for doing all that, we do need additional data. Reporting of asset managers can only be as good as the reporting by investee companies. So, the recent proposal by the Commission for the Corporate Sustainability Reporting Directive, the CSRD, is a huge step forward. It should definitely help narrow down the existing data gap.

And other initiatives that will help close that gap includes the creation of this European Single Access Point, the ESAP, and a much hoped for future proposal of the commission for a regulatory framework for sustainability-related services providers. But then even with its expanded scope, there will still be many non-EU companies not covered by the CSRD. Therefore, what’s needed is a globally accepted disclosure system. Currently we operate in a fragmented landscape of different public and private ESG disclosure frameworks, each addressing different needs and presenting different approaches or specifications. This hinders comparability and the investors’ ability to integrate ESG into their decision.

Not without the increase in costs for operators and ultimately clients?

“Absolutely. I think the multiplication of standards comes with a cost and eventually this cost is borne by the investors, affecting the overall performance of the investments, at a time where we know that retail investors need to move away from cash and into markets. And this need for global consistency should happen and we are very optimistic following the announcement by the IFRS Foundation, that they will establish a so-called Sustainability Standards Board on the occasion of the COP26 in November, in Glasgow. And we very much hope that the commission, but also EFRAG here in the EU, will cooperate with this Sustainability Standards Board of the IFRS Foundation, to make sure that we have global standards going forward.

Indeed, global standards will be the next big gain, but it will certainly not be easy because if you see the difficulties that we had on the European level to already commit to a European environmental taxonomy. Imagine what difficulties we will have on a global scale when we go, not only about environmental, but also social and other standards, because sustainable finance is way larger than the environment. But maybe let’s take a look now at the capital markets, which you already mentioned. And you did indeed talk about retail investors in the context of the COVID recovery. Why is it important to increase retail participation in capital markets and how do we get there?

“Well, this is a really key theme for us, Nicolas. It is commonly accepted that the European financial system is still very much bank-based as opposed to market-based. And this is reflected in the structure of the financial position of European households who keep a large chunk of their financial wealth in bank deposits. At the end of 2019, this share was around 37% or more than 11.5 trillion euros. And while many people do manage to save for their old days, their assets by enlarge, sit in bank deposits. And this comes with a huge opportunity cost and may also give rise to potential unrest in the future. Given the difficulties that an increasing number of people are expected to have to make end meets, once they are retired. That’s a real pensions time bomb and a huge social challenge. We, at EFAMA –

A fertile ground for populists?

“Indeed, for us, sustainable finance is obviously a key priority, but this retirement savings gap is a special priority. And we have made some calculations at EFAMA, to illustrate the opportunity cost associated with having too much of your savings sitting in bank deposits. Now, during the 2008–2019 period, European households saved an additional 4.1 trillion euros in bank deposits, 4.1. Now, if they had saved only one half of that amount in deposits and invested the other half in an equal mix of equity and bond funds, over that same period, that original 4.1 trillion figure would have been 1.2 trillion euros higher by the end of 2019. This is absolutely huge.

And in its revised CMU action plan, the commission has recognised this issue and the absolute necessity to foster increased retail participation in capital markets. And we fully support the commission’s efforts to address this issue and make the EU an even better place for individuals to save and invest for the long-term. But for that to happen, Nicolas, we need to empower citizens to make adequate, well-informed investment decisions. And this requires an improvement in the quality, in the consistency, and in the delivery of disclosures to retail clients. And this has been acknowledged by the commission, who just published a couple of days ago, a consultation paper on the upcoming, so-called European Retail Investment Strategy, which will cover many of these issues. And this is much welcomed.

And apart of the retail participation in capital markets, are there other parts of the European Commission’s CMU action plan in its revised form, that you feel strongly about?

“Like many other trade associations in the financial services sector, we support the focused approach taken by the commission in its revised CMU action plan and the various actions defined in the plan. But the emphasis on supporting the development of local capital markets is particularly welcomed, as a well-developed financial ecosystem is still missing in many member states. And we also liked the focus on listed equities. There is far too much debt in the system and not enough equity, and this is particularly worrisome as it makes our economy more vulnerable to a downturn and does not allow the proper financing of innovative companies.

We do need vibrant European public equity markets, and we welcome the commission’s efforts in that space. This is particularly important for UCITS, given the assets that are eligible for UCITS investment. We further support the aim of the commission to incentivise long-term investments by insurance companies and we feel that the priority should really be to focus on the institutional investors. This is likely to be much more impactful in the short-term. Insurance companies and pension funds hold the key to the further development of equity markets in Europe.

Though of course, I did mention that increasing retail participation in markets is important, but let’s face it, this will take time. It’s also a question of financial education, of pension policies, of taxation, but if we focus immediately on the institutional investors, much progress can be made. Other than that, I think tax is another big issue, the withholding tax relief procedures remain very complex and clearly constitute an obstacle to cross-border investments and probably an explanation for the home bias of many portfolios. So, we welcome the action envisaged by the commission to propose a common standardised EU-wide system for withholding tax relief at source.

And maybe as a last point, I would mention the commission’s intention to promote market-making by banks and other financial firms. Liquidity needs to be improved, especially in the corporate bond market and the CP market. The market-making capacity of banks has reduced substantially following the adoption of new prudential requirements. And here, it’s important to distinguish fund liquidity from market liquidity. The events of March last year have demonstrated that the liquidity of funds is properly managed and the existing regulatory framework is robust. What needs and must be improved, first and foremost, is market liquidity.

If I may now, before we conclude, turn to a topic that has also been high on Luxembourg’s agenda, in particular, the asset management industry here, and that is the question of central supervision. I understand EFAMA has been on the record about opposing central supervision of investment funds. Does it see merit in improving the supervision of funds or managers, notably the way they may fall under the jurisdiction of multiple regulators and creating overlaps to avoid grey areas?

“We are indeed highly skeptical of the need for central supervision of investment funds in the EU. The EU 27 is characterised by a multicenter financial architecture with some important funds hubs and national competent authorities having developed real expertise in supporting local ecosystems. And proximity here is very important. And frankly, in the absence of any market failure, we feel that the case for justifying an overhaul of the current supervisory architecture is very weak. More convergence and transparency are certainly needed, but this kind of practical objective should be clearly distinct from the more political objective of centralising the supervisory powers at the level of ESMA in Paris.

Both from a business and investor protection perspective, such a centralisation at the level of ESMA is unlikely to significantly enhance the quality of supervision over asset management companies. Now, to your question, improvement in the supervision of funds and their managers are possible, obviously, and needed. And efforts must be made to prevent regulatory arbitrage, forum shopping, in the race to the bottom, but in our view, this can be achieved by having ESMA making full use of the supervisory convergent tools at their disposal.

We struggle to understand the rationale behind offering ESMA greater supervisory powers at this stage. This would be disproportionate. We are confident that a greater and better use of the tools at ESMA’s disposal could gradually bring the national competent authorities to further harmonise their practices and ultimately, do away with harmful gold plating, that is not in the interest of the CMU. And frankly, if the current toolbox of ESMA proves insufficient, then we should consider enriching that toolbox instead of unnecessarily granting additional direct supervisory powers to ESMA. So, in one word, enhancing the single rule book and supervisory conversions should be the priority.

Well, thank you very much. And I would, before we end this, like to ask you one final question, which is not necessarily related to asset management, but more to your free time. And that is whether you have had the time to read a book that you would like to recommend in particular to our audience?

“I like the question. I’ve had the time because I don’t need much sleep, so I end up reading quite a bit and a few months ago in the winter, I read three books about the rise of China as a global superpower. And I read them one after the other, which provided me with a very interesting perspective on things. And all three books were excellent reads and fascinating. So, if I –

If you allow me to see if I’ve read them as well, because I read a lot on China.

“Yeah. Then probably you will have read maybe The New Silk Roads by Frankopan, which I found fantastic.

Yes. Frankopan. Yep. As his previous one was. Yeah.

“Correct. Another one is AI, so artificial intelligence, Superpowers: China, Silicon Valley, And The New World by Lee, Kai-Fu Lee.

Yep. Exactly. I have read that one too.

“And the third one is in French, Il est midi à Pekin, which I guess can be translated as, it’s noon in Beijing, by Eric Chol.

I don’t know that one.

“This I recommend also highly because frankly, those readings taken together, are really eye opening and anyone questioning the necessity for having a stronger and more United Europe should read those books because it gives us an idea of what is happening beyond our borders and really coming our way.”

Well, thank you very much, Tanguy, for sharing your insights with our audience. And thanks also to our listeners who have tuned in again to this podcast. In our next episode, I will be speaking to Pierre Gramegna, Luxembourg’s Minister of Finance. He will join us for the second time in this podcast, after having been the very first guest, last year in September. To stay up-to-date with our podcast, please feel free to subscribe on iTunes, Spotify, or Google. You can also find more information on our website, luxembourgforfinance.com.