The age of the ETF is looming

Exchange traded funds are much more than just passive index-trackers

Robin Wigglesworth

Almost everything can be and is being put in an ETF structure, including Cathie Wood’s hyper growth-oriented stock picking strategies at Ark Invest © Alex Flynn/Bloomberg

Like an ageing boxer who is still on top but starting to lose some of their pace and power, the mutual fund is slowly but surely being supplanted by a newer, brasher invention: the exchange traded fund.

Before dwelling on why, it is important to acknowledge what a phenomenal invention the open-ended mutual fund has been — arguably one of the greatest in financial history, whether ranked by success, longevity or social usefulness.

Globally, there are more than 70,000 mutual funds with combined assets of almost $40tn, according to Morningstar. 

The combined private equity and hedge fund industries can muster maybe a fifth of that, and with a more controversial social impact. 

Despite a decade of rampant growth, there is still just $9tn in ETFs globally. 

Yet the era of the ETF is dawning.

The latest sign of a baton being passed came last week, when JPMorgan Asset Management said it would convert four actively managed mutual funds with $10bn of assets into ETFs. 

This followed Dimensional Fund Advisors earlier this summer turning $29bn worth of mutual funds into ETFs. 

Many more conversions are in the works. 

Bloomberg Intelligence’s ETF analysts reckon that more than $1tn of mutual funds could be transformed into ETFs in the coming decade.

But even excluding conversions, the ETF is ascendant. 

In the first six months of the year there were 109 new mutual funds launched in the US, but 199 ETFs, according to Morningstar. Nowadays, even Capital Group — long hostile to the idea of ETFs — is planning to enter the field. 

Why the shift?

In the US, tax efficiency is one big reason. 

Unlike mutual funds, the ETF structure means investors typically do not have to pay capital gains tax until they actually sell.

Yet ETFs are now a global phenomenon. 

Their success cannot be written off as simple tax arbitrage.

For one thing, the tradability of ETFs makes distribution much simpler. 

Anyone can buy an ETF listed on any major stock exchange, often without paying any commission.

The biggest advantage, however, is its flexibility. 

Because of its genesis as an index tracker, the ETF is widely associated with cheap, passive investment strategies. 

The vast majority of the industry’s $9tn of assets are indeed in such vehicles. 

Yet this obscures the fact that the ETF has evolved into much more than just a next-generation passive fund.

In reality, the ETF is an adaptable wrapper for all sorts of investment strategies, and able to package up virtually any market into tradeable, Lego-like blocks of risk, whether offshore Chinese equities, bank loans, stock market volatility or carbon credits. 

Nowadays, almost everything can be and is being put in an ETF structure, from Cathie Wood’s hyper growth-oriented stock picking strategies at Ark Invest, to Tuttle Capital’s launch of an “anti-Ark” ETF that will allow people to short Wood’s flagship fund.

Not everyone is convinced by the durability and flexibility of the ETF structure, or thrilled by its rise. 

Even Jack Bogle was a sceptic. 

Shortly before he passed away, Vanguard’s founder wrote that while he would unhesitatingly call the ETF the 21st century’s “most successful financial marketing idea”, he archly noted that “whether it proves to be the most successful investment idea of the century remains to be seen”.

Undoubtedly, people are doing silly things with ETFs, which is affecting markets. 

For example, packaging up derivatives that would normally be off-bounds to most retail investors is a potentially dangerous regulatory workaround. 

Moreover, unlike mutual funds, ETFs cannot be closed to new investors — a structural flaw in some areas where there can be diminishing returns if the investment vehicle becomes too big.

Most of all, there will probably always be question marks around the resiliency of the share creation-and-redemption process that underpins the ETF ecosystem. 

The structure held up well in the crucible of the global financial crisis and the Covid-19 market crash, but every crisis is subtly different and the next one could reveal hidden faultlines.

However, at some point, critics need to stop blaming the wrapper for all that ails markets and instead point the finger at people that put dumb or dangerous stuff inside it, or invest without understanding what they are buying.

No one blames mutual funds writ large for every bout of idiocy that has befallen investors in one, and ETFs should not be treated as a homogenous blob either. 

The mutual fund is not going the way of the dodo any time soon, but the next age of investing likely belongs to the ETF.

sábado, septiembre 04, 2021



The perfectionism trap

Society bombards us with instructions to be happier, fitter and richer. Why have we become so dissatisfied with being ordinary?


As a young university lecturer two decades ago, I taught a course on 19th-century American literature. 

Though I loved the period, my students were less enamoured. 

Most would give up on “Moby-Dick” or Ralph Waldo Emerson’s “Essays” after only a few pages, then sit in seminars coiled in silence, hoping that I wouldn’t call on them.

Roy was different. 

He was prodigiously well-read and discussed our texts with passionate intensity, which his classmates observed with a mixture of perplexity and awe. 

At the end of term, most students handed in efficient and entirely unremarkable essays. 

But Roy came to my office two days before the deadline begging for an extension.

I explained to him that I couldn’t grant him extra time without a doctor’s note and that he’d lose marks for giving in the work late. 

I urged him to go home and just write his essay. 

He had already demonstrated that he had numerous interesting things to say.

Roy said he’d actually already written the piece. 

Why then, I asked, hadn’t he submitted it? 

“Because it’s terrible,” he replied, screwing up his face in agony. 

He implored me for a few more days’ grace; I insisted that it wasn’t in my power.

The essay came in a day late. 

Despite being docked five points, it still scored a high mark.

Roy continued to hand in work late for the remainder of his degree and nonetheless came top of his year by some distance. 

The following year he enrolled on a Masters programme I ran. 

His work became ever more dazzling and the delays in submission more protracted. 

When he came to see me a week before the deadline for his final dissertation, I spotted an angry rash across his forehead. 

In some alarm, I asked if he was well.

“It’s fine,” he snapped. 

“I just rub away at the skin when I’m stressed, that’s all.” 

I then noticed that his nails were bitten past the quick and his fingers had swollen red pads.

I directed Roy to the student-counselling service. 

At first he refused to engage with it, but he soon realised that it could support his requests for an extension. 

The official September deadline passed, but Roy’s counsellor helped him stretch it until the following January.

Just before Christmas Roy came to see me, unkempt and staring glassily into the middle distance. 

There was no chance of getting his dissertation completed in time, he told me. 

By now I had learned the art of gentle remonstration. 

This was a Masters dissertation not his life’s work, I pointed out. 

It didn’t need to be perfect.

“Trust me,” he replied with a mirthless laugh, “it’s a world away from perfection.

It’s not even in the same galaxy.” 

I surmised that he had written it, a fact which he confirmed. 

“I’ve also read it”, he added, “which gave me no option but to delete it.” 

Slack-jawed, I asked him if he had kept a copy.

He hadn’t. 

He’d wiped out more than 20,000 words. 

“I have way too much respect for you to have subjected you to them,” he told me.

This turned out to be the last time I saw Roy. 

For the next year and a half, he was granted extension after extension as a result of his ongoing anxiety. 

When the final extension expired, he submitted neither a dissertation nor an excuse. 

I wrote to him and asked whether he had a draft to show me. 

“Not that I’m willing to inflict on you, I’m afraid,” came his reply. 

I didn’t hear from him again.

Among the texts on the undergrad syllabus I taught to Roy was “The Birth-Mark”, a short story by Nathaniel Hawthorne written in 1843. 

It’s the most chilling study I know of the psychology of perfectionism.

Aylmer, a young scholar of science, develops an increasingly febrile obsession with a small red birthmark on the cheek of his beautiful young wife Georgiana. 

He finds her tantalising proximity to perfect beauty intolerable.

To him the birthmark was a sign of the “fatal flaw of humanity…[a] symbol of his wife’s liability to sin, sorrow, decay and death”. 

Georgiana learns to see herself in the distorted mirror of her husband’s gaze and comes to share his horror of the birthmark. 

She begs him to use his ingenuity to correct “what Nature left imperfect”.

Installing his wife in a concealed boudoir by his laboratory, Aylmer subjects her to various alchemical concoctions. 

While she is cloistered away Georgiana reads her husband’s scientific diary, only to discover a litany of disappointments: “Much as he had accomplished, she could not but observe that his most splendid successes were almost invariably failures, if compared with the ideal at which he aimed.”

Georgiana is unable to bring herself to draw the obvious conclusion: her husband’s morbid obsession with her “fatal flaw” is a displacement of his disillusionment with himself. 

Instead she deludes herself that his horror at her imperfection is a noble expression of love. Aylmer distils a mysterious potion with the taste of “water from a heavenly fountain”, which Georgiana drinks. 

The birthmark disappears but no sooner has it done so than Georgiana expires.

This disturbing fantasy of an odd young man in an underground laboratory has since become a real aspiration for men and women all over the world. 

It’s hard to read Hawthorne’s tale and not think of reports of people dying or being maimed after having plastic surgery in Turkey or the Dominican Republic.

Like the virus itself, perfectionism adapted to the very conditions that had begun to neutralise it

Changing the dimensions of a nose or bust has come to represent the much desired yet unattainable hope of a perfect future. 

This is just one of the perfectionist fantasies that plague our consumerist lives. 

Perfect weddings, homes and holiday destinations beam out from advertising hoardings, tv screens and social-media platforms, inciting feelings of envy, inadequacy and longing in billions of viewers.

In my work as a psychoanalyst I frequently encounter people in the grip of some punishing ideal of professional, romantic, physical or moral perfection. 

Rarely a day passes without at least one patient lamenting or berating themselves for having fallen short of an exacting goal or standard they had set for themselves. 

The self-laceration is usually amplified by the belief that someone else they know – a colleague, sibling or friend – would, in their place, have mustered the necessary effort or guile to succeed.

As lockdown began last spring, I felt I was beginning to see many of my patients let go of the perfectionist demands they had placed upon themselves. 

Institutions and businesses adapted to home working, and many people saw a lull in the workload, a break from the constant surveillance and an opportunity to recalibrate their priorities. 

They embraced simple pleasures – baking, walking, reading, talking – and seemed optimistic about their relationships with their partners and families.

I was particularly surprised by the unfamiliar spirit of self-acceptance that accompanied these changes. 

“I felt a bit gleeful submitting that policy review,” said Polly, one of my patients. 

“It was pretty ropy.” 

Having described herself as “pathologically conscientious” the first time we met, she now took pleasure in producing work that was “barely up to scratch”. 

“Call it payback for the thousands of hours of unpaid overtime I’ve put in over the years.”

The restrictions had opened her mind to all that she was missing: gardening, cycling with her partner, playing board games with her kids. 

But after about six weeks, I felt this new mood of indulgence wane and the old demands punitively re-emerge.

Like the virus itself, Polly’s perfectionism had adapted to the very conditions that had begun to neutralise it. 

She had thought that she could elude the surveillance and judgment of her line manager at home; now she was increasingly conscious of being noticed on Slack. 

She had found a new source of competitiveness in home-working: who could be more productive under these added pressures?

I began to notice some version of this shift in many of my patients: more stringent fitness regimes, more vigilant attention to their children’s home-schooling. 

They also became increasingly irritable and frustrated with partners, colleagues and, at times, me. 

“Don’t you ever think self-examination can sometimes get in the way of practical action?” one man asked me. 

“Don’t you feel it’s sometimes better to stop wallowing and just get on with it?”

This mood was discernible beyond my consulting room, the sense that this slowdown had been a temporary respite but it was time to get serious again. 

Perfectionism was back, as alluring and unforgiving as before.

The reprieve from perfectionist zeal, followed by its remorseless return, made me think that perfectionism might be a deep-rooted and persistent element of the human condition. 

After all, the Bible begins with the fall from grace of divinely created beings into sin and mortality.

Some version of this origin story can be found across cultures. 

From this perspective, religion is an extravagant scheme for the recovery of our lost perfection, at least in its monotheistic variants.

But religion also has a contrary, or perhaps complementary, purpose. 

For centuries it was the primary means through which we came to terms with being fallen and flawed – imperfect, in short. 

Religious striving for moral and spiritual improvement goes in tandem with the sombre recognition that perfection belongs to God alone.

When mortals in the Bible or mythology, such as the architects of the Tower of Babel or Prometheus, attempt to usurp divine status, they are duly punished. 

In the religious imagination, the notion of human perfection is blasphemy.

The bonds of religion loosened with the advent of industrial society. 

Nietzsche observed that the denizens of a secular modernity, having killed God, were unable to live without him. 

In his place they invented an array of new gods: Culture, Science, Commerce, the State, the Self.

From Emerson’s provocative defence of “self-reliance” in 1841 to the rise of the self-help industry from the 1930s and the emergence of our own selfie culture, selfhood was regarded as our highest value and the object of our striving. 

Educational, aesthetic and financial betterment and the need for validation from others are the elements that form the perfectionist air we all now breathe.

Perfectionism “makes for a thin life, lived for what it isn’t rather than what it is”

The imperative towards perfection remains as potent and pervasive as ever. 

In an article in 2017 two British psychologists, Thomas Curran and Andrew Hill, ascribed an exponential rise in perfectionism among the younger generation to the “increasingly demanding social and economic parameters” within which they struggled to make their lives. 

They also blamed “increasingly anxious and controlling parental practices”.

Over-crowded labour markets, particularly for desirable professional and creative jobs, as well as unaffordable housing, are driving young people and their parents to ever greater lengths to secure a competitive advantage. 

So begins another unpaid internship, further training or some other side-hustle.

By linking the spread of perfectionist anxiety to the atmosphere of precarity and competition conjured by the free market, these psychologists anticipated a critique of meritocracy by Michael Sandel, an American philosopher. 

In “The Tyranny of Merit”, published in 2020, Sandel argues that meritocratic capitalism created a permanent state of competition within society, which corrodes solidarity and the notion of the “common good”. 

This system sustains an order of winners and losers, breeding “hubris and self-congratulation” among the former and chronically low self-worth among the latter.

In such a culture, young people are likely to grow dissatisfied both with what they have and who they are. 

Social media creates additional pressure to construct a perfect public image, exacerbating our feelings of inadequacy.

In the absence of intrinsic feelings of worth, a perfectionist tends to measure her own value against external measures: academic record, athletic prowess, popularity, professional achievement. 

When she falls short of expectations, she feels shame and humiliation.

This weight of society’s expectations is hardly a new phenomenon but it has become particularly draining over recent decades, perhaps because expectations themselves are so multifarious and contradictory. 

The perfectionism of the 1950s was rooted in the norms of mass culture and captured in famous advertising images of the ideal white American family that now seem self-satirising.

In that era, perfectionism meant seamlessly conforming to values, behaviour and appearance: chiselled confidence for men, demure graciousness for women. 

The perfectionist was under pressure to look like everyone else, only more so. 

The perfectionists of today, by contrast, feel an obligation to stand out through their idiosyncratic style and wit if they are to gain a foothold in the attention economy.

Perfectionism is not solely a malign force, however. 

The demand for perfection may be stifling, but a perfectionist can also feel that his achievements are the only thing holding him together. 

When we’re overwhelmed by life and chastise ourselves for our inadequacies, a stellar test score or a thousand Instagram likes can deliver the fleeting sensation that everything is under control.

That sensation quickly fades, of course, and requires constant refreshing. 

As Moya Sarner, a writer steeped in psychoanalytic ideas, put it to me: “It makes for a thin life, lived for what it isn’t rather than what it is. 

If you’re forever trying to make your life what you want it to be, you’re not really living the life you have.”

In 1990 Randy Frost, an American psychologist, developed 35 questions designed to measure perfectionism. 

His “multidimensional perfectionism scale” distinguished between three broad types of perfectionism.

The first type is self-oriented perfectionism, a persecuting refrain which insists that you should do better. 

It breeds a highly motivating, but ultimately exhausting, obligation to become an idealised version of yourself: happier, fitter, richer (comparative adjectives are often found on the covers of self-help books).

In my consulting room, this often takes the form of patients berating themselves for eating an almond croissant or binge-watching police procedurals instead of working on a presentation or checking over a child’s history essay.

The second type is socially prescribed perfectionism, which leaves us trying to live up to the expectations of others. 

This often expresses itself in fantasies of criticism, as an internal monologue tells us how we should be and what we should do. 

We hear snide deprecations of our insufficiently gracious manners, ugly clothes or dull conversation.

Third comes other-oriented perfectionism, which turns that persecutory voice outwards as we demand that those around us also live up to our impossible ideals. 

This is most noxious when wielded as an instrument of power: the parent who asks his child why she got only nine A-grades, or the boss who can’t see why his employee can’t just power through the flu. 

Other-oriented perfectionism is almost always projection, finding failure and disappointment in others that we can’t bear to see in ourselves, in the flimsy guise of authoritative criticism.

It has a chameleonic ability to adapt itself to different character types and vulnerabilities

These are interesting notions, yet as soon as we encounter actual people it’s hard to distinguish between these categories. 

The imperative to be thinner or smarter is often fed by a chorus of internal and external voices. 

It’s easy to see how feelings of self-criticism might be channelled into criticism of others.

Perfectionism is slippery. 

Clinically it is reflected in a dizzying range of symptoms: depression and anxiety, obsessional disorders, narcissism of the “thin-skinned” type (when a projected grandiosity conceals intense fragility), psychosomatic illness, suicidal thoughts, body dysmorphia and eating disorders. 

Perfectionism has a chameleonic ability to adapt itself to different character types and vulnerabilities, which is perhaps why it has never been categorised as a discrete mental disorder.

This also means that perfectionism can grow from the soil of very different childhood experiences. 

Curran and Hill are correct to note that “helicopter parents” – those who oppressively supervise their children’s academic and extracurricular activities – have contributed to an increase in perfectionism. 

But my own experience has shown me that very different styles of parenting can have similar outcomes.

The hands-off parent who keeps a more respectful distance from their child’s life can induce a deep longing in the child for the kind of recognition he believes can be won only through the never-ending accumulation of achievements. 

The child who feels she can’t win, that her best efforts at rugby or chess or cheerleading will only draw her parent’s niggling criticism, will also be afflicted by a permanent itch to do better.

Yet the child whose parent assures him that every doodle or gold star is a landmark achievement may also come to feel himself under constant pressure to live up to the achievements of his early years. 

Whichever way you approach parenting, you may end up stoking your children’s desperate need to please and create a lifelong difficulty in distinguishing their own desires from your aspirations for them.

This may sound like the formula for blaming the parents that many people view as the essence of psychoanalysis. 

But you could also regard it as a humane acknowledgment of how hard it is to get parenting right. 

The sweet spot between over-involvement and under-involvement in our children’s lives is maddeningly elusive.

The difficulty of escaping the snares of perfectionism suggests that it has a place deep in the structure of the human psyche. 

However we are brought up we internalise an ideal of the person we aspire to be.

Psychoanalysts refer to this as the ego ideal, an image of the perfect self which, as infants, we saw reflected back to us in the adoring gaze of our parents or carers. 

But at that point in our life we also acquire a superego, the internalised voice of a harshly critical parent, which is typically amplified much later by other adults in positions of authority such as teachers or bosses. 

Both the personae inhabiting our psyche can feel accusatory. 

Perfectionism grows out of self-love and self-abasement.

Some psychologists argue that perfectionism doesn’t need to be pathological. 

In 1978 D.E. Hamachek, an American psychologist, drew a distinction between normal and neurotic perfectionism. 

The normal perfectionist can set high standards for themselves without descending into punitive self-criticism. 

They can even take pleasure in striving for improvement.

Subsequent researchers have questioned Hamachek’s distinction, arguing that the desire to be perfect can never be “normal”. 

The yearning for something that is intrinsically impossible can result only in feelings of frustration and inadequacy. 

My own work with perfectionists has led me to reach a similar conclusion. 

Yet though perfectionism can corrode our sense of self-worth, few of us would want to give up the ambition to develop and grow.

How might we protect this aspiration from the incursions of perfectionist zeal? 

There are no easy answers. 

Something about being human makes it difficult to feel that we have done, or are, enough. 

We are unwilling to extinguish the hope that, one day, we will be recognised as exceptional: the perfect being that our parents once placed on a pedestal.

Serge Leclaire, a French psychoanalyst, posited the intriguing idea that life sets us the task of metaphorically killing this wonderful child. 

We must continually renounce the fantasy of an ideal self and grieve its impossibility.

This idea always brings to mind one of my first patients, a woman in her 20s whose mother had recently died of a terminal illness. 

Her parents had divorced when she was a toddler; her father remarried and lived abroad with a second family. 

Lydia was tormented by her own image, posting selfies obsessively and tracking the number of likes, while forensically examining her skin, teeth and figure for flaws.

As she’d grown up, her mother had devoted herself to a successful business career, outsourcing child care to successive au pairs. 

Lydia couldn’t get her mother to take an interest in her everyday struggles with schoolwork, friendships and boys. 

The only way she could reliably claim her attention was through fashion and grooming – makeovers, manicures and clothes shopping online. 

She would recall her mother looking lovingly at her as she applied mascara or brushed her hair, and telling her how lovely she was, how lucky any man would be to have her one day.

“And then I’d try to talk to her about a problem with a teacher or a friend and I’d see the interest almost literally drain from her face, as though it was all too much to take on.” 

Lydia coped by becoming robustly self-reliant. 

But when her mother died, she found herself taken over by the quest for physical perfection.

I suggested to Lydia that she felt compelled to turn into the lovable child she had seen reflected in her mother’s gaze when they jointly focused on applying makeup. 

This suggestion triggered an outpouring of long repressed anger and frustration. 

“If I’d screamed at her when she was alive, she’d barely have registered it,” she said, weeping bitterly. 

“And now she’ll never hear me at all.”

Lydia’s rage was a form of delayed grief, not just for the mother she had lost but for the perfect child she fleetingly felt herself to be when she managed to hold her mother’s attention. 

Mourning that child enabled her to wean herself off the obsessive self-scrutiny.

Soon after she stopped posting selfies, Lydia came to see me one day with a smile on her face. 

“As I was leaving for the session I caught myself in the mirror”, she said, “and I thought, oh, I’m actually fairly attractive!” 

She was now laughing heartily. 

“But funnily enough, I’m no supermodel. 

And even more surprisingly, I’ve no wish to be one.”

Perfectionism may appear to spur us on to adult successes. 

But in truth it is a fundamentally childish attitude. 

It imbues us with the conviction that life in effect ends when we give up hope of becoming the best version of ourselves. 

On the contrary, as Lydia discovered, that is the moment at which life can finally begin.

Josh Cohen is a psychoanalyst and professor of modern literary theory at Goldsmiths, University of London. His books include “The Private Life”, “Not Working” and “How to Live. What to Do”

The Missing Link in Europe's AI Strategy

Europe can become a global leader in artificial intelligence, but only if it protects its citizens and involves workers in the regulatory and deployment process. In that regard, the European Commission’s recent draft regulation leaves much to be desired.

Aida Ponce Del Castillo

BRUSSELS – The European Commission’s strategy for artificial intelligence focuses on the need to establish “trust” and “excellence.” 

Recently proposed AI regulation, the Commission argues, will create trust in this new technology by addressing its risks, while excellence will follow from EU member states investing and innovating. 

With these two factors accounted for, Europe’s AI uptake supposedly will accelerate.

Unfortunately, protecting EU citizens’ fundamental rights, which should be the AI regulation’s core objective, appears to be a secondary consideration; and protections for workers’ rights don’t seem to have been considered at all.1

AI is a flagship component of Europe’s digital agenda, and the Commission’s legislative package is fundamental to the proposed single market for data. 

The draft regulation establishes rules concerning the introduction, implementation, and use of AI systems. 

It adopts a risk-based approach, with unacceptable, high-risk, limited, and low-risk uses.

Under the proposal, AI systems deemed “high-risk” – posing significant risks to the health and safety or fundamental rights of persons – are subject to an ex ante conformity assessment to be carried out by the provider, without prior validation by a competent external authority. 

Requirements include high-quality data sets, sound data governance and management practices, extensive record-keeping, adequate risk management, detailed technical documentation, transparent user instructions, appropriate human oversight, explainable results, and a high level of accuracy, robustness, and cybersecurity.

The Commission says that its definition of AI, as well as the risk-based approach underpinning the draft regulation, are based on public consultation. 

But the fact that industrial and tech firms constituted an overwhelming majority of the respondents to its 2020 AI White Paper suggests an exercise that is far from democratic. 

These businesses, while pretending to promote knowledge, science, and technology, steered the regulatory process in a direction that serves their interests. 

The voice of society, in particular trade unions, was drowned out.

The regulation has several shortcomings. 

Among them are the Commission’s narrow risk-based approach, the absence of a redress mechanism, the failure to address the issue of liability for damage involving AI systems, and a reliance on regulatory sandboxes for providing “safe” environments in which to test new business models. 

The draft also fails to deliver from a worker-protection perspective.

To address this shortcoming, an ad hoc directive that focuses on AI in the context of employment, which would protect workers (including those in the platform economy) and enable them to exercise their rights and freedoms on an individual or collective basis, would be a possible way forward.

Such a directive should address several key issues. 

For starters, it should set employers’ responsibilities in preventing AI risks, in the same way that they are obliged to assess occupational health and safety hazards. 

AI risks extend further, because they include possible abuses of managerial power stemming from the nature of the employment relationship, as well as other risks to workers’ privacy, fundamental rights, data protection, and overall health.

Safeguarding worker privacy and data protection is equally vital, because AI is hungry for data and workers are an important source of them. 

The EU’s General Data Protection Regulation (GDPR) is a powerful tool that, in theory, applies to workers’ data in an employment context, including when these are used by an AI system. 

But in practice, it is almost impossible for workers to exercise their GDPR rights vis-à-vis an employer. 

The EU should introduce additional provisions to ensure they can.

Making the purpose of AI algorithms explainable is important, too. 

Here, firms’ workplace transparency provisions will not protect workers. 

Instead, employers, as users of algorithms, need to account for the possible harm their deployment can do in a workplace. 

The use of biased values or variables can lead to the profiling of workers, target specific individuals, and categorize them according to their estimated “risk level.”

Another priority is ensuring that workers can exercise their “right to explanation.” 

The implication, here, is that employers would be obliged to consult employees before implementing algorithms, rather than informing them after the fact. 

Moreover, the information provided must enable workers to understand the consequences of an automated decision.

The new ad hoc directive should also guarantee that the “human-in-command” principle is respected in all human-machine interactions at work. 

This involves giving humans the last word and explaining which data sources are responsible for final decisions when humans and machines act together. 

Trade unions should be considered as part of the “human” component and play an active role alongside managers, IT support teams, and external consultants.

Furthermore, EU lawmakers must prohibit algorithmic worker surveillance. 

Currently, worker monitoring is regulated by national laws that often predate GDPR and do not cover advanced, intrusive people analytics. 

AI-powered tools such as biometrics, machine learning, semantic analysis, sentiment analysis, and emotion-sensing technology can measure people’s biology, behavior, concentration, and emotions. 

Such algorithmic surveillance does not passively scan workers but rather “scrapes” their personal lives, actively builds an image, and then makes decisions.

Lastly, workers need to be able to exercise agency by becoming AI-literate. 

Teaching them technical digital skills so that they can operate a particular system is not enough. 

Understanding AI’s role and its effect on their work environment requires workers to be informed, educated, and critically engaged with the technology.

Regulating AI systems, in particular those deemed high-risk, should not be based on their providers’ self-assessment. 

Europe can become a global leader in the field, and foster genuine public trust in and acceptance of this emerging technology; but only if it effectively protects and involves its citizens and workers. 

No “human-centric” AI will ever exist if workers and their representatives are unable to flag up the technology’s specific employment-related risks.

In that regard, the Commission’s draft regulation leaves much to be desired. 

The European Parliament and EU member states must now act and, in particular, integrate worker protection in the final version of this key regulation.

Aida Ponce Del Castillo is a senior researcher at the Brussels-based Foresight Unit of the European Trade Union Institute.