Germany’s asset servicing market boasts a reputation of having a developed and mature market against a stable backdrop in its political environment, as well as a robust economy and healthy consumption rate.
The current COVID-19 pandemic has seen a range of relief and temporary support measures of monetary policy and fiscal stimulus measures launched by the European Central Bank (ECB), but also at the national level through various legislative and government measures taken by national governments.
These measures also include the German legislator passing a law that aims to mitigate the consequences of COVID-19 in respect of various specific corporate, insolvency, contract and criminal law matters.
This is in addition to earlier legislative changes that provide a protective shield for employees as well as tax-related liquidity assistance companies affected by the economic fallout.
As in other countries, these legislative changes aim to preserve and facilitate the continuation of firms that have or may become affected and/or insolvent as a result of the on-going economic difficulties.
As part of that goal, the German Federal Government has passed legislation introducing a new economic stabilisation fund (WSF) that will be able to provide guarantees of up to €400 billion for debt instruments from when this legislation enters into effect until 31 December 2021 as well as to provide support to alleviate liquidity concerns and assist recapitalisation efforts, including by purchasing certain eligible debt and equity instruments, up to an overall limit, and in respect of certain companies that meet eligibility criteria.
These measures are in addition to easing conditions for existing loans from German state bank KfW, and launching additional targeted programmes. These measures above may have a wide range of impact on issuers, collateral management but also on asset servicing.
Equally, and perhaps more importantly for asset servicing business in Germany, the ECB Single Supervisory Mechanism and the BaFin have communicated various temporary easing of regulatory standards that apply to a range of financial services providers – notably banks, Michael Huertas, partner, co-head financial institutions regulatory Europe at Dentons, observes.
Huertas says: “Some of these changes while directed primarily at banks in terms of focusing on their capital conservation, agreeing to the deferral of paying dividends and carrying-out buybacks may also carry through to other market participants.”
Despite the temporary relaxation of certain rules, Huertas also explains that there is likely to be “much sharper supervisory scrutiny on how firms over the medium to longer-term comply with EU and national rules on non-performing loans (NPLs), credit servicing standards and consumer protection more broadly”.
He adds: “This is in addition to supervisors regrouping their 2020 priorities and focusing much more intensely on how firms are managing operational resilience pressures both from cyber and more a traditional set of risks.”
Brexit impact
Although any talk of Brexit has been quiet in recent weeks due to the COVID-19 outbreak, questions have been asked as to whether Frankfurt will be able to strengthen its position as a financial centre as a result of the UK’s exit from the EU.
Anja Maiberger, managing director, in charge of sales and relationship management CACEIS Bank’s German branch, explains that although the UK will no longer be in the EU, it will remain a “large and unique” market in terms of asset management.
Maiberger suggests that Frankfurt, along with Paris and Luxembourg, “has certainly benefited from Brexit, and a number of banks have also taken the major strategic decision to move their European headquarters to continental Europe”.
In terms of the longer-term effects relating to Brexit, Societe Generale’s Christian Wutz, managing director, Germany, says that this is not easy to predict as Brexit took place at the end of January and further development is yet to be observed.
Research from industry experts has suggested that as a financial centre, Frankfurt has attracted the most “Brexit companies” within the remaining EU. Around 30 banks and 20 financial service providers have moved to the city and approximately 1,500 new jobs have been created, according to the research.
Investor attraction
With firms relocating to Germany as part of Brexit plans, the country continues to be an attractive location for institutional investors.
Wutz explains that the German regulatory framework of the fund market offers institutional investors “a safe environment for the growth of their assets creating an ideal market for alternative investment funds”.
One of the most attractive investment vehicles for asset owners on the German market is the special fund. Wutz suggests that, like mutual funds, special funds are subject to the Investment Act and the supervision of BaFin but are less regulated.
Under German law, no more than 30 investors may participate in special funds. As a rule, however, only a single investor is involved in a special fund.
Wutz says: “The market had growing overall assets under administration rates of nearly 16 percent during 2019. This specific German fund type enables individual and flexible income management for institutional investors who pursue individual investment objectives, such as insurance companies, pension funds, church associations or foundations.”
Maiberger also explains that BaFin legislates to ensure a secure and stable regulatory framework for local and foreign investors, “making Germany an attractive jurisdiction for launching funds and running an asset servicing business”.
ESG factors
In order to maintain its reputation, and keep in line with global trends to become more eco-friendly, industry experts have identified a trend by German institutional investors who are increasingly looking to take sustainability criteria into account for their investment decisions.
Environmental, social, and governance (ESG) factors have become more mainstream in recent years within asset servicing, but there are opportunities to be had for the market.
Daron Pearce, CEO of Europe Middle East and Africa at BNY Mellon Asset Servicing, suggests there are opportunities for the asset servicing industry in ESG analytics and reporting, “though challenges remain with inconsistent ESG data and an absence of standard ESG terms, metrics and reporting frameworks”.
Wutz also suggests that previously ESG was “purely an afterthought”, however, now asset managers can create their own criteria for their portfolios, “it is increasingly moving from a post-trade to a pre-trade subject”.
Wutz says: “The question here is whether these criteria will be undermined by law in the future. In France, for example, there has been an article in the Energy Transition Act since 2015 that obliges institutional investors to publish their carbon footprint.”
Maiberger adds: “Market awareness of ESG factors is growing and as the legal framework governing ESG becomes better defined, investor demand for ESG-related reporting will increase.”
On the horizon
Although future priorities are likely to change due to disruption from the COVID-19 pandemic, and will continue to change depending on the state of the market, Pearce suggests that asset servicing providers continue to evolve to differentiate themselves through rapidly developing opportunities of digitisation, data management and automation.
Pearce predicts: “Technology will allow the industry to reshape the operating model. The focus of this transformation process is the seamless integration between front, middle and back-office systems that simplifies data exchange and data management, streamlines the processes of institutional investors, asset managers and the asset service providers, as well as delivering a better client experience.”
Maiberger also expects technology to be key to the development of service in the asset servicing industry.
She highlights: “Client demand for new servicing solutions depends greatly on a group’s technical proficiency, financial strength and ability to spread the cost of development across multiple clients.”
The German regulator will continue to adapt the regulatory framework to raise investor protection levels, according to Maiberger. She concludes that this “will serve to improve investor confidence in German financial institutions and the companies that service their assets”.
