From big clean ups to generation shake ups: what awaits Europe's investment market

The non-regulated investment environment: how long can it really hold?

The industry is just steps away from a “big clean-up". Not only local governments but also the European Union has taken major steps in recent years tending to less developed segments of licensed activities.  As the European Union has always tried to safeguard its consumers, it is only a matter of time before the EU will be regulated.

Last summer, the EU adopted a comprehensive and innovative regulatory framework on markets in crypto-assets (MiCA). It will regulate crypto-asset markets, and companies will come under real financial supervision (Source), bringing protection for investors that previously was absent.

The EU Retail Investment Strategy proposal is another industry-changing initiative. Societies' participation in investment markets is still modest – according to Eurostat data, merely 17% of EU household assets are held in financial securities, such as stocks and bonds, while in the United States, it reaches 43%. Overall, approximately 30% of retail savings are allocated to equity and investment fund shares, showing a cautious attitude. Placing the consumers’ interests at the center of investing, this strategy aims for fair treatment and protection while boosting their confidence to invest and taking full advantage of the EU's capital markets. 

It is packed with a broad set of measures, such as transparency of costs, high standards of professional qualifications for financial advisors, financial literacy empowerment, and more. Importantly, it aims to strengthen cooperation among national and European Supervisory Authorities for the proper application of rules across the EU and efforts to combat malpractice and fraud. Although this initiative will not become applicable sooner than 2026, it is set to reshape the landscape of retail investment across Europe (Source, Source, Source). 

Regulation as the new normal is around the corner with two possible triggers: investors, becoming more educated about the nature of investments, will boycott unlicensed services, and increased regulatory oversight at both local and EU levels. We just need to wait and see which breaks out first.

The true reward of regulation: business and investor perspective

While a "gain-fast" approach with faster and cheaper operations might seem attractive, the magic lies in long-term sustainability.  For businesses, choosing regulation before it's mandated means risk reduction in their operations and opportunity to influence processes and industry development working in tandem with the regulator. The security guarantee which a license gives to business might be more attractive to potential clients, knowing their finances are in supervised hands. 

Investors, on the other hand, are open to a set of benefits: potential fraud risks are reduced or eliminated through regulation, along with legal protection and a repayment obligation fund. Since due diligence has been done by the regulator, the investor can also take this important task off his shoulders, easing the choice making. All this adds to the confidence needed for retail investors to actively be involved in an already healthier investment environment.

Gen alphas: the newcomers and dealbreakers

And then the generation shift comes in. Generation Alpha is the newest generation on the block, shaping the future of work, finances, consumption, and all related. The oldest members of Gen Alpha are 14 years old (Source), only four years from now they potentially might begin their financial and investment activities. Why is it important to highlight them in the context of the future of investing? According to McCrindle Research, it is anticipated to be the largest generation yet, with approximately 2.5 billion people by 2024, having the greatest spending power in history (Source).  

I have high hopes that this will be the generation that starts the healing process from the overconsumption culture, that challenges today's society, and leaves with less available funds for investments. So, more free financial resources could appear, allowing Gen Alphas to start saving at an earlier age. That's why they and their families must think and work on their financial literacy sooner, not to get bruises at the very start. Just like brushing your teeth every day, gaining financial base knowledge from trustworthy sources should become a part of Alpha's daily hygiene routine. The sooner such positive habits form, the greater the benefit in the future. 

If we model how the industry should then adapt, I see movements in sustainable investment projects on platforms as Alphas could look for investments with social significance. They may not be profit generators for the business and investor but serve the greater good.  

Gen Alphas will never know the world without AI, chatbots, virtual games, smart systems, and e-wallets. Technology being a fundamental part of their lives, bugs from investment service providers will not be forgiven. Platforms should fly at super speed, and work flawlessly while being visually attractive. Also, plain products won't do the trick – the industry needs to think about ways, gamification models, to make youngsters feel comfortable and cool to spend time on the investment platforms. 

Elevating Baltic economies: licensing as a product for future growth

I am especially pleased to see specific measures being implemented by the national regulators of the Baltic States to fix the industry flaws. As a state institution that is interested in improving the local economy, it seems regulators understand the need to delve into the investment field. We can draw a parallel with a business plan: if the state makes a good licensing project, we attract companies from abroad to start their business here, employ local specialists, and pay taxes, thus benefiting the national economy.  

For example, Latvia a few years back figured out a way to license P2P platforms by successfully implementing Investment Brokerage Firm licensing (Source). As a logical continuation to MiCA, in Spring 2024 the Estonian government approved a new bill establishing legal requirements for cryptocurrency service providers to be regulated under the supervision of the Estonian Financial Supervision and Resolution Authority (Source). It means strengthened operational and reporting requirements, which companies will need to comply with if they wish to continue to operate.

Yes, there are some loopholes to be fixed in the process, but regulators are open to cooperating with the industry, and sharing ideas to work them out. For instance, how to ease the bureaucracy burden for small platforms such as Nectaro and not put us up for the same requirement package as traditional and long-standing banks.   

If you ask if regulation matters, I firmly say yes. By choosing it ourselves from the very beginning when obtaining a license for the Nectaro platform, we know the complexity of the process and the benefit it outweighs – for us, our clients, and the local economy in general. Now it is up to the business which road to choose – get regulated by the financial authorities or go rogue, being aware of the challenges this presents for the business itself and its clients, regardless of generation. 

Either way, as Europe's investment market braces for these changes, all generations, not only Gen Alphas, should prioritize financial literacy. By understanding the backbone of investments and why they matter, combined with the upcoming regulatory measures, it will open new doors for wealth. Businesses, too, must acknowledge the value of regulation if they are in the game for a marathon, not a sprint.