Competitiveness, both in general and in the financial services sector, is a “hot topic,” noted , Luxembourg for Finance’s deputy CEO in his introductory remarks to an LFF livestream dedicated to global competitiveness held on 23 January 2024. Two former Italian prime ministers--Enrico Letta and Mario Draghi--have been tasked with .
But Europe has been lagging behind since the global financial crisis, from Luxembourg for Finance and the Official Monetary and Financial Institutions Forum (OMFIF) published in early January. “The European banking market cap fell, in fact, from $2.7trn in $1.4trn in the period between 2007 and 2021, while US banking market cap rose from $1.6trn to $2.6trn in the same period,” said Gorbutt, highlighting one of the report’s findings. The share of funds from Europe has dropped from 47.1% in 2007 to 21.9% in 2022 among the 100 largest asset managers globally.
Opportunities in sustainable and digital finance
“But the story is not all doom and gloom,” Gorbutt added. “Europe--and the EU in particular--has made strides in the likes of sustainable finance and in the digital financial services revolution.”
For Clive Horwood, deputy CEO & managing editor of OMFIF and one of the speakers during the livestream, “there’s no doubt that Europe is in an advanced position compared to the US and Europe” in terms of green finance. For instance, through --meant to help the economy recover from the covid-19 pandemic and build a greener, more digital future--and NextGeneration EU green bonds, the European Commission will become the .
The European Union also has its taxonomy system, which aims to help companies and investors classify environmentally sustainable economic activities, along with regulation like the Sustainable Finance Disclosure Regulation (SFDR) or the Corporate Sustainability Reporting Directive (CSRD), to help support the green transition.
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The signs are “very good” in technology and financial services, added Horwood. The (which aims to support innovative financial products, set rules on cryptoassets and boost digital resilience, amongst other goals) “hits all the right buttons” by tackling fragmentation, inspiring innovation or ensuring common data access and provides a “very good framework for the future.”
“We’ve certainly seen Europe becoming a leader in data,” he said. The General Data Protection Regulation (GDPR) caused “a lot of friction” when it first came into play, but “data is so crucial to this technological and digital revolution that we’re gong through in all areas of our lives, including financial services. And Europe has created a really good playing field for that.” Europe, for example, has done “a lot of work” in terms of modernising payment systems and developing central bank digital currencies.
Europe ahead
With GDPR, but also the Digital Services Act, the Digital Market Act and, more recently, regulation related to artificial intelligence, the European Union is ahead, noted Anthony Wolf, partner in banking, insurance and actuarial services at the consulting firm SIA Partners, speaking during a separate panel.
In the US, for instance, where regulation can be applied at the state level, “there can be big differences from one state to the other.” California, one of the “most advanced states,” has the California Consumer Privacy Act, which aims to help protect consumer data. But the regulation is not unified across the country, as it is in the EU.
Need “balance” between innovation, data protection
In terms of artificial intelligence--a and beyond--the European Parliament, Council and negotiators reached a preliminary agreement on the artificial intelligence act in December, noted Gorbutt. “That raises the question of the extent to which the balance is being maintained between, on the one hand, consumer protection, security, regulation, and on the other hand, innovation. How do we make sure that we strike the balance between those?”
“Regulation is needed. We can clearly see it,” Wolf emphasised. “Artificial intelligence is a wonderful tool. It gives incredible possibilities and will completely change our way of living, our way of working and our relationship with the technical environment.”
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“But it’s also a risk. And today, we see that a lot of companies in the financial industry--but also in other industries--are starting to look at how they can use artificial intelligence and how they can implement artificial intelligence within their services.” However, it’s easier to apply a regulation from the start, he argued, rather than waiting for people to develop and implement solutions, then impose a regulation a few years later, which could force companies to take a step back.
Regulation provides a “clear path” for companies’ growth, and also has “an impact on competition, because a lot of companies are looking at what the others are doing.”
“My personal opinion is that we need to find a good balance between regulation and development,” said Wolf. “This is the role of the regulator, but they also need to listen to the market, they need to communicate with the big players in the artificial intelligence industry and try to find a common ground, where Europe could actually find the perfect balance between innovation and data protection.”
Pragmatism and clarity will be key, Gorbutt summed up.
Consider competitiveness when preparing regulation
To ensure Europe’s competitiveness, “I think we need a different regulatory approach,” said OMFIF’s Horwood at the conclusion of his panel discussion. Banks and financial services are sometimes seen as “a bit of a problem child that constantly needs to be supervised,” he said.
But Horwood said he saw banks and asset managers as “key drivers of economic growth and innovation,” and would prefer to see potential regulations run “through the lens” of how it might affect the competitiveness of financial institutions.
“I think this is a really good time for European financial services--the best it’s been for at least 10 years. But the whole of that ecosystem needs to come together to make sure that the opportunity is taken.”
Find the full replay of the Luxembourg for Finance livestream .