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Today New City Initiative is comprised of 43 leading independent asset management firms from the UK and the Continent, managing approximately £500 billion and employing several thousand people.

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CMU's lack of ambition starts to show

Published by Charles Gubert

At the point at which the Capital Markets Union (CMU) was formally announced, there was an outpouring of support from financial services, a sector which until then had faced a barrage of regulations and added costs. CMU was welcomed by financial institutions and industry bodies representing them because its end goals stood to benefit the entire European financial ecosystem and the real economy - if implemented correctly.

Almost three years after its launch, there are some very serious questions about what – if anything CMU – has actually achieved. Jaws recently dropped at an Association of the Luxembourg Fund Industry (ALFI) Conference, which took place in the Grand Duchy when David Wright, a 34-year veteran of the European Commission and former secretary general of IOSCO, stated that the CMU had failed and needed to be completely overhauled.

This is a stark analysis but there is some truth in it. Very few participants in the funds’ industry can list many tangible benefits that CMU has brought them. A number of experts believe CMU’s failings are directly correlated to Brexit as it is no longer the priority it once was. Others concede the departure of the biggest financial services market in the EU was always going to wound CMU in terms of both its scope and ambition.

ELTIFs: Good in theory, bad in practice

Many of the initiatives outlined in the CMU were not defective ideas, but they have been implemented badly. The ELTIF (European Long Term Investment Fund) is a prime example. The framers behind the ELTIF saw it as a fund structure regulated under AIFMD which would give retail investors and smaller institutions exposure to illiquid assets like infrastructure, real estate and loans, enabling them to generate consistent, long-term returns.

It is here where regulators misread the market, which is why the AUM at ELTIFs has remained so stubbornly low since the brand’s creation. Most retail investors do not want to be trapped in an investment vehicle for a decade, not least one like infrastructure which is vulnerable to political risk. The absence of liquidity is therefore a massive problem for retail investors, who prefer products offering daily or weekly redemption terms. 

Furthermore, ELTIFs are subject to onerous investment restrictions, deterring some institutions from putting money into them, particularly when they can allocate directly or indirectly through their consultants to unconstrained infrastructure, real estate or private credit managers. Even the CMU’s commendable attempt to lower the Solvency II capital requirements for insurers to tempt them into ELTIFs has not had its intended impact.

Harmonising distribution does not go far enough

NCI lobbied EU regulators and educated them extensively about the benefits of streamlining the existing cross-border fund distribution process, an activity which is rife with localised charges, registration requirements and arbitrages across member states. NCI estimated the total initial costs of marketing  a fund throughout the EU (plus Switzerland) for a typical manager was in the region of EUR 1.5 million, which is why so few firms actually passport across all EU markets.

The EC’s proposal to align regulatory fees and excuse managers from having to appoint local agents in countries where their funds are being marketed was a positive step but many believe the reforms simply do not go far enough. Furthermore, the decision by the EC to heavily restrict pre-marketing has frustrated fund managers as it makes it harder for them to engage with investors prior to launch without being AIFMD registered.

Boutiques feel particularly disenfranchised as it will impede them from meeting with prospective investors in European markets as they simply do not have the resources to become AIFMD registered in jurisdictions where there is no firm assurance that investors will commit capital. Ironically, the EC’s proposals on marketing – while attempting to iron out arbitrages – will actually deter managers from selling into certain European countries.

Fixing a broken CMU

These are just a handful of instances where CMU has struggled. Other areas of financial services report similar frustrations with CMU. The Simple, Transparent and Standardised Securitisation Regulation (STS), for example, has not resurrected the European securitisation market, mainly because the rules are too complex and not bold enough, according to multiple industry practitioners. 

Nonetheless, there are some CMU reforms, which could prove to be successful. The establishment of the PEPP (Pan-European Personal Pension) product is gathering momentum and attendants at the ALFI Conference seem to be genuinely excited by its development. Providers – including asset managers – see it as a useful tool by which to enter the European personal pension market, although it is still early days. 

CMU is very expansive and it would be unfair to presume that all of its programmes and initiatives will be hugely successful. However, there is a growing realisation that too many schemes are succumbing to failure, mainly because they are not ambitious enough, applying only token or piecemeal changes to remedy engrained problems. Unless regulators step up a gear, the CMU is likely to turn into a very damp – albeit well-intentioned - squib.