Mr. Ralf brenner
Counsel

Ralf Brenner is a banker and lawyer, he has worked as Head of Legal and Compliance and as an anti-money laundering officer since 2006. He has also been a managing director at Société Générale Securities Services GmbH since the beginning of 2018. Ralf Brenner joined GSK Stockmann in 2021 and advises asset managers, banks and funds providers on regulatory issues as well as outsourcing. Furthermore, he supports foreign asset managers, particularly in the Master-KVG business.

In his 20 years as an in-house expert, team leader and head of entire departments within legal and tax divisions of asset management firms, he has gathered extensive experience in consulting on and implementing regulatory issues, in particular under the German Investment Code (KAGB), the German Banking Act (KWG) and the German Securities Trading Act (WpHG), including responsibility for the establishment, re-licensing and takeover of asset management firms (M&A).

Asset Management Trends in Germany 2024

2022 marked a turning point for the asset management industry in Germany. The war in Ukraine, together with the energy crisis, inflation and rising interest rates on the stock and bond markets, has led to significant price declines. As a result, the sector has been undergoing a massive transformation in response to challenges such as fee pressure, rising costs and shifting investor preferences, including growing interest in alternatives, thematic investment needs and digital engagement preferences in 2023. These challenges have been worsened by an economic environment characterised by market volatility as well as specific crises like in the digital assets market.

The following trends and factors will play a key role in developments in 2024:

1. Increased Automation

Automation is revolutionising global asset management, and the story is not different in Germany. Artificial intelligence, machine learning, and robotic process automation are increasingly being harnessed for functions such as risk assessment, pattern-based predictions, and routine management tasks. This helps to eliminate human errors, optimise processes, and enhance efficiency. However, it is crucial that asset managers ensure transparency and ethical use of these technologies to mitigate any unfair practices. The financial services industry has been on a journey over the past five to ten years to implement digital operating models. Unfortunately, most asset managers are lagging behind. However, due to the impact of COVID-19 and the explosion in fintech, there is a new sense of urgency to implement and improve digital operating models.

2. Sustainable Investing

Interest in sustainable or ESG (environmental, social and governance) investing has been growing and is now becoming more and more mainstream as investors are becoming aware of the impact of their investments on the environment and society as a whole. Asset managers have to incorporate ESG factors into their investment decisions. The implementation is still the biggest challenge due to unclear and changing regulations and missing data. Channelling capital based on ESG factors has an impact:

“It creates pressure on companies to disclose more about what they’re doing and to potentially also change their practices,” says Ioannis Ioannou, a professor of sustainable investment at London Business School¹https://www.europeanbusinessreview.eu/page.asp?pid=5806. and a visiting professor at Miami Herbert University.

Sustainable investing is on the rise globally, with assets under management having surged from USD 30.7 trillion in 2018 to USD 35.3 trillion in 2020, according to the Global Sustainable Investment Alliance.²https://www.weforum.org/agenda/2022/02/sustainable-investing-esg-finance-future-norm/.

3. Data-driven Decisions

The use of big data and predictive analytics in investment decisions is expected to continue to expand. Having access to real-time data and analytics enables asset managers to make more informed decisions and improve returns. Data is also key to successfully implementing ESG.

According to McKinsey,³https://www.mckinsey.com/industries/financial-services/our-insights/advanced-analytics-in-asset-management-beyond-the-buzz leading firms are applying advanced analytics throughout the entire asset management value chain—with real-world results. More and more asset managers are applying these tools to improve distribution effectiveness, investment performance, and productivity in their middle and back offices.

4. Personalised Services

Digital platforms and technologies are enabling a shift toward more tailored services in asset management. These tools allow asset managers to create individualised investment strategies based on clients’ unique goals and risk tolerance. Delivering personalised experiences can enhance client satisfaction and loyalty. Again, balancing this personalisation with robust data security measures is imperative.

5. Cybersecurity

As the reliance on digitalisation increases, so does the importance of cybersecurity. Asset management firms need to take robust measures to protect clients’ sensitive information and guard against potential cyber threats. Unfortunately, cyberattacks are also part of the digital future. An investment in advanced cybersecurity technologies, employee training, and establishing a culture of security is key to maintaining trust and confidence among clients. A wide pool of technologies and procedures are available to mitigate the impact of potential cyberattacks.

6. Regulatory Changes

The asset management industry is already heavily regulated and changes in these regulations have an impact on trends. Asset managers will need to stay up-to-date on any changes within this challenging regulatory landscape, which is driven by general topics such as ESG and the Retail Investment Strategy in addition to industry-specific issues, namely effects from the Alternative Investment Funds Directive (AIFMD), the Regulation on European Long Term Investment Funds (ELTIF) as well as the Undertakings for Collective Investments in Transferrable Securities Directive (UCITS). In addition, asset managers in Germany are faced with local developments.

Over recent years, asset managers have faced a significant volume of new ESG regulations and requirements, and evolving interpretations of these rules. These companies are seeking to meet their clients’ evolving preferences and expectations, while minimising regulatory and reputational risks.

Within the context of ESG regulation, the potential for greenwashing remains one of the main concerns for regulators. This concern is reflected in a variety of new rules and disclosure requirements. However, all of these new rules depend on or presuppose a common understanding of what is meant by the term “sustainable”.

The regime under the Sustainable Finance Disclosure Regulation (SFDR) remains a work in progress. Asset managers need to adopt a coherent and comprehensive approach to monitoring, understanding and implementing further regulatory guidance. In addition, the legislator will have to decide if reporting standards will adhere more closely to the SFDR approach or the Corporate Sustainability Reporting Directive (CSRD).

In addition to disclosure requirements, the EU was the first out of the blocks with the development of a sustainability label (Ecolabel) for investment products, but it has delayed issuing a formal proposal. Around Europe there is a common focus on fund names and the use of ESG terms. The outcome of the latest proposals will require fund managers to review their products and documentation.

The European Securities and Markets Authority (ESMA) has proposed guidelines on fund names. It does not intend for the guidelines to interfere with existing requirements under the SFDR or the EU taxonomy, but it has proposed quantitative thresholds with minimum investment holding requirements in the case of EU funds using ESG- or sustainability-related words in their names. Any SFDR Article⁴Funds Sector 2030: A Framework for Open, Resilient & Developing Markets funds using ESG-related terms will be particularly impacted by the proposals.

In the meantime, some member states have implemented their own requirements.

EU firms have been required to embed sustainability considerations in their day-to-day operations. ESMA guidelines on suitability and on product governance to complement the underlying rules have also been finalised. In addition, the EBA has published a report that sets out how regulators should incorporate ESG risks in their supervisory approach.

As the work of the International Sustainability Standards Board progresses, many jurisdictions are introducing mandatory reporting on climate risks for listed corporations, but with different timeframes and with different sizes and types of companies effected. Without alignment, it will remain challenging for managers to gather the data and information they need regarding their investments for the purposes of making such disclosures.

Following a 2021 consultation, the European Commission has published proposals for an EU “Retail Investment Strategy” as part of its Capital Markets Union initiative. The proposals aim to modernise and streamline the investment framework in order to increase trust, transparency and investor participation. Notably, the ESMA and the European

Insurance and Occupational Pensions Authority (EIOPA) will have important roles to play, with increased powers and resources.

The Commission’s initial considerations, including the introduction of a “semi-professional” client category and a potential ban on inducements, have been debated and discussed in industry circles. In the case of the former, the Commission has proposed only a small number of adjustments to the definition of professional client. In the case of inducements, the Commission is now proposing only a partial ban. However, various other amendments to enhance investor protections have been proposed, including a form of “value for money” assessment. Given the provisions would apply only 18 months after the amendments enter into force, as well as the scale of the proposed changes, the implementation timeline is likely to be challenging.

A wide range of firms will be impacted by the proposals, including fund, wealth and asset managers, banks providing retail investment services, insurers offering investment products, platforms, investment advisers and retail brokers.

The proposals take account of the ESMA’s recent opinion on considering “undue” costs in UCITS and AIFs, including assessing the eligibility of costs, developing a structured pricing process that has to consider various factors, and reimbursing investors in a timely manner, where required. MiFID and IDD firms will also need to implement a structured pricing process. Notably, the ESMA and EIOPA would be given a mandate to regularly update cost and performance benchmarks, against which manufacturers would need to compare their products before offering them on the market. New reporting obligations on costs and charges would feed these publicly available benchmarks, although the goal is to base the reporting requirements on existing data where possible. In addition, aspects of the product governance requirements (e.g., on the product approval process) will be amended.

Firms would need to display risk warnings for “particularly risky” products (to be defined by the ESMA and EIOPA); disclosures would be provided in electronic format by default (aligning IDD requirements with MiFID); firms would have to provide a new annual statement to clients; there would be a standardised format for presenting information on costs, associated charges and third-party payments; and a standard disclosure document would be introduced for life insurance products.

New obligations on marketing communications are being considered, such as the requirement for management bodies to define, approve and oversee a policy on marketing communications, a clearer division of responsibility between manufacturers and distributors, and enhanced record-keeping requirements.

Changes to MiFID for clients requesting to be treated as “professional” would include reducing the minimum wealth criterion from EUR 500k to EUR 250k, and adding a new criterion for professional experience and education.

New requirements to strengthen the knowledge and skills of investment advisers and wealth managers, including maintaining these through continuous yearly training and development (to be evidenced with a certificate).

Adapting the advice suitability and appropriateness test requirements: New obligations (such as explaining the purpose of the assessment in a clear and simple way) and expanding the appropriateness test to encompass the client’s risk tolerance and capacity to bear full or partial losses. Notably, a streamlined suitability assessment is envisaged where firms could provide advice on a limited range of diversified, non-complex and cost-efficient financial instruments.

Tackling bias in the advice process: A ban on manufacturers paying inducements to distributors for execution-only sales (i.e., no ban on advised sales — though this position could be reviewed three years after the proposals come into force), rules to “further substantiate” the need for firms to act in their clients’ best interests, and new tests for advisers to consider when recommending products.

Strengthening supervisory enforcement: New powers would be given to national competent authorities to act in cases where investors may be harmed (for example, to take swift action against misleading market practices and carry out “mystery shopping” exercises), and to introduce reporting on cross-border services.

Promoting financial literacy: Member states would be required to promote measures to improve the education of retail clients.

Amendments to the PRIIPs Regulation: In addition to the above changes that will be brought about through a new directive, the Commission has proposed amendments to the PRIIPs Regulation. They include changes to the PRIIPs Key Information Document (KID) such as introducing a new section (“product at a glance”), removing elements that are not considered effective (e.g. the “comprehension alert”), and the addition of a new sustainability section that builds on existing ESG disclosures ( “how environmentally friendly is this product?”). There are also measures to modernise and simplify the KID and a preference for electronic formats.

The Commission’s proposal has already been debated in the Committee on Economic and Monetary Affairs (ECON) of the European Parliament and is highly disputed. It will have to be further debated, negotiated and agreed between the European Parliament and the Council, which could result in various amendments to the proposals. The Commission is assuming the legislation will enter into force in 2025. In the meantime, some may question whether the proposals go far enough to improve retail customer outcomes, but others may argue that some developments are better than none.

In Germany the asset management industry faces an additional challenge, as the German regulator wants to digitalise the reporting process for the industry by using the existing reporting tools of the German regulator, which more than anything else will mean more work for asset managers.

The European Commission has adopted proposals to amend the AIFMD and the UCITS Directive. These proposals include the harmonisation and tightening of the minimum substance requirements for AIFM and UCITS management companies, new liquidity management requirements for UCITS and open-ended AIFs, targeted amendments to rationalise the requirements for depositories and new eligibility, conduct and reporting requirements for AIFs that engage in lending. There is no mention of the long-promised AIFMD passport for non-EU AIFMs. Non-EU AIFMs operating under the Article 42 AIFMD regime should be aware that some of the new requirements will apply to them.

The Commission has amended the ELTIF Regulation as it was noted that the advantages of ELTIFs were diminished by restrictive fund rules and barriers to entry for retail investors. The Commission’s amendments aim to increase the popularity of ELTIFs among retail investors by broadening the scope of eligible investments, reducing barriers preventing retail investors from accessing ELTIFs and easing the rules restricting fund distribution solely to professional clients. The first new products were already launched in the beginning of 2024.

7. Conclusion

The digital revolution, coupled with the rise of AI and machine learning, has set the stage for a more efficient era of asset management. However, the emphasis on automation will not decrease the need for human expertise. Rather, it will change the nature of expertise required, with a greater focus on data analysis, ethical considerations, and AI oversight.

The rise of ethical investing calls for a holistic approach where investments are not just financially but also socially and environmentally profitable. Cultivating such an environment will not only help guard against the existential threat of climate change but can also unlock new markets and opportunities for growth.

The focus on big data and predictive analytics enables a proactive approach to decision-making. Asset managers are poised to better understand the market trends and their clients’ individual needs. However, the ethical use of data will be of paramount concern. Ensuring that data is handled responsibly and securely encourages trust and fosters long-term client relationships.

The customisation of services, facilitated by digital platforms and technology, is another trend tailored to improve customer satisfaction. However, asset managers must balance personalisation with data security concerns to protect clients’ interests and maintain their trust.

Lastly, the potential regulatory changes in a post-COVID-19 world require a high degree of adaptability. Staying up-to-date with regulatory shifts and demonstrating flexibility in business strategies will be key factors in surviving and thriving in this dynamic ecosystem.

In conclusion, asset managers in Germany who can successfully navigate these trends are the ones who will be best positioned in 2024. Importantly, the evolution of asset management in Germany will hinge not just on the adoption of new technologies but on mitigating their risks and leveraging their potential responsibly. Asset management is about to enter a digital, sustainable and data-driven era, filled with potential for innovation and rich in opportunities for those ready and willing to adapt.