A lack of trust in the investment market has led to the rise of passive investing, according to the head of advocacy and capital markets policy research at the CFA Institute.
Olivier Fines told FTAdviser this was a problem for policymakers because it impacted funding of the economy and businesses.
“Investment funds in Europe in general are too small and too costly, especially when you consider simple products [such as] traditional equity or bond products," he said.
He said the combination of that and the impact of the financial crisis in 2008 led to a lack of trust in financial markets.
Fines said: “This has in turn prompted the rise of passive investments…which cannot be a solution.
“From policymakers’ perspectives, if you want to fund the economy, rising enterprises or even green plans, you need to have a sound active investment sector, if you want that to channel funds into sectors that have been underfunded in the past.”
Additionally, Fines added, you need competition in the market to gradually increase operational efficiency.
“It’s difficult to create competition, just like that. You can’t declare that and assume it will take place magically, it takes time and infrastructure.”
Tracker funds now account for £292bn of assets in the UK, according to data from the Investment Association. This compares to overall invested assets which sits at £1.5tn.
System not conducive to competition
Fines said one of the issues in the European market was the bancassurance model, which involves large banking conglomerates distributing their own products at high prices through their own networks.
“This is not conducive to competition and to lowering costs,” he said.
He added that the Mifid regulation was created with the purpose of breaking those vertical barriers.
“We’re not there yet. If you move away from a vertically integrated model…this ensures lower costs and better flow of capital across the system.”
Part of the Mifid II regulation, introduced in 2018, included rules that asset managers must split out the trading costs paid by clients of banks from the cost of the research the bank provides.
Independent research providers have recently complained to regulators that their businesses are being hurt by "unfair competition" after large banks cut the cost of research.