European financial services had witnessed a marked decline in global market share over the past 15 years, particularly within the asset management sector. This trend was highlighted in a joint report by OMFIF and Luxembourg For Finance, which focused on the competitiveness of European financial services.
To counteract this downturn, Europe needs to cultivate a more diverse and sophisticated investor base, the report’s authors argue. Enhancements in financial education and pension reforms can significantly stimulate growth in the European investment fund sector. “The comparatively small and less sophisticated retail investor base in Europe has also contributed to the relatively stunted trajectory of the European asset management industry,” they said.
The report revealed a stark decrease in Europe’s presence among the top 100 global asset managers, with its share plummeting to 21.9% in 2022 from 47.1% in 2007. Europe was home to only three of the top 20 asset managers globally and three of the 20 largest banks by market capitalisation.
OMFIF (Official Monetary and Financial Institutions Forum), a London-based independent think tank focusing on central banking, economic policy, and public investment, collaborated with Luxembourg For Finance, a government agency promoting the financial sector, to produce this report.
‘Far behind’
Clive Horwood, Deputy CEO at OMFIF, highlighted the widening gap between Europe and the US post the 2008 financial crisis. He pointed out that US fund managers now dominate over 70% of the global market, compared to Europe’s 22%. “Europe has fallen far behind the US since the 2008 financial crisis,” said Horwood.
Nicolas Mackel, CEO of Luxembourg For Finance, regarded the report as a pivotal reference for future financial services policies in Europe. He emphasised the importance of uniting efforts to overcome the fragmented nature of Europe’s financial services and to complete the capital markets and banking unions.
The report attributed the decline in European financial services to factors like weak GDP growth, market fragmentation, heavy regulatory burdens, and an underdeveloped retail investor base. It suggested that achieving a capital markets union would have addressed fragmentation but might not have fully counteracted the cultural tendencies towards home bias among investors.
Financial education and pension reform
A more diversified and sophisticated retail investor base in Europe, bolstered by financial education and pension reform, could enhance demand for European asset managers. The report compared the investment habits of European and US households, noting a significant disparity in the sophistication of investment choices.
Retail investors in Europe are less sophisticated than their US counterparts. OECD data showed that in 2022, just 13% of US household financial assets were held in currency and deposits, compared to an average of 38% for Europe. Data from the European Capital Markets Institute showed that investment funds and equities accounted for 30% of financial assets for EU households, compared to 47% in the US.
The report cited cultural factors as a partial explanation for this disparity, with the US seen as a more entrepreneurial and risk-taking culture than Europe, which leads to more diversified investments. Asian investors, it said, had the potential to leapfrog Europe because they were more adept at embracing digitalisation.
Europe has advantage in ESG
Where European funds have a comparable advantage was in sustainable finance, the report said, referring to EU frameworks and standards such as those laid down in for example the Sustainable Finance Disclosure Regulation, or SFDR. “Europe’s leadership in ESG standards and regulation gives the European asset management industry an edge to introduce new innovations and build scale globally,” the OMFIF-LFF report said.
When it comes to digital financial services, there were opportunities for Europe to set the pace in central bank digital currencies, distributed ledger technology, and artificial intelligence. The OMFIF-LFF research indicated that a holistic and clear market framework for Europe could be “fruitful” if it manages to balance regulatory clarity with the allowance for new technologies.
“Boosting European financial market activity in this way would have positive spillovers for asset managers,” the report said. “The challenge is to tread the difficult line between promoting security and resilience without stifling innovation.”
European funds have lost significant market share
Share of top 100 asset managers’ AuM by region (%)
