A divisive European Commission proposal for a unified retail investment strategy is seen as one of the final pieces of EU legislation that is due to be approved in the months ahead, before next year’s EU elections. The industry’s objections are being heard in Brussels, it has become clear in recent weeks. Investors could end up pulling the short straw, critics argue.
After the Commission first presented its plans in May, the European Parliament is due to give its final vote at a plenary Strasbourg meeting in February, but only if the Economic affairs committee manages to reach a compromise deal in January.
That a fierce debate is looming came to light with the presentation of the amended proposal by the parliament’s rapporteur, French liberal MEP Stéphanie Yon-Courtin (photo), who until November 2022 also served as vice president on the economic affairs committee. Her amendments, tabled earlier this month, have removed key components of the Commission proposals that are designed to make investing in financial markets more attractive for retail investors across Europe.
‘We need to advance fast’
Yon-Courtin’s amendments have completely removed flagship elements such as the value-for-money concept, the best interest test for investors and a partial ban on inducements paid to financial intermediaries. She also proposed to extend the review period, when the Commission can reconsider the legislation, to five years from three.
“As you know we are facing time constraints with the European elections and we need to advance fast. This is why I have underlined that this report will be a work in process,” Yon-Courtin told Investment Officer. (For her full comments, see the sidebar box at the bottom of this article.) “I don’t believe that a ban is the magic solution to all of our problems. This is even more relevant with the rise of digitalisation. Citizens want both online services and human advice.”
FinanceWatch, an activist consumer group tracking financial legislation, said Yon-Courtin's draft report, if adopted, “would be a bad outcome for retail investors”. It essentially would preserve the status quo in the EU capital markets ”which harms consumers at a very large scale,” said Peter Norwood, senior research officer at FinanceWatch.
Better Finance, an investor interest group, hopes that the parliament will restore the three key elements, “without which much of the value of the retail investment strategy would be completely erased,” spokesman Arnoud Houdmont said.
‘Once in a lifetime opportunity’
The retail investment package “represents a once in a lifetime opportunity to improve the situation of individual investors and financial consumers, as the status quo has so far failed to adequately serve the public,” said Houdmont. “The current system, in contrast, has primarily benefited the financial industry and is fiercely defended by the only group benefiting from the status quo: the financial lobby.”
In Luxembourg, bank industry group ABBL, which lobbies in Brussels together with the European Banking Federation, and consultancy firm EY last Friday hosted an joint webinar about the retail package. The webinar was not open to the public, but Marilyn Rinck, financial markets advisor at ABBL, addressed the industry’s reservations in an interview.
Wealth managers need better definition of retail
Further clarification is needed in the EU proposal on the definition of retail clients, she explained. Especially in private banking and wealth management that definition lacks clarity. “Advanced retail clients” are currently subject to a knowledge test and a transaction test based on at least 40 transactions per year. Rinck said this applies to “a bit less than half of all clients” in private banking and wealth management in Luxembourg.
Furthermore, the ”value for money” concept proposed by the EU Commission risks unintended consequences that “will hinder the market in terms of product development and will reduce the range of products available,” she said. Under this concept, clients need to receive a document that benchmarks the costs of the investment product against competitors. The proposal is “too detailed” and needs further discussion, Rinck said.
“This will add another layer of complications for the customer and for the retail customer. This is something that many of them would never understand,” she said.
‘Could reduce universe of products’
The combination of this concept with the proposed “Best Interest Test” risks even further reducing the universe of products. “The intention behind it is good. You get fewer complications with understandable products,” Rinck said. “A document should be presented to the client, another document, that shows him how to understand the costs of the manufacturer. ‘This is a benchmark of all the different products on the market everywhere; our product here is near to this’... That’s another extra layer of complication for the client.”
ABBL, as well as other sector representatives in Brussels, supports an alternative that keeps the benchmarking action at a product governance level, internally at the bank or asset manager. “Then it makes sense to have to prove internally that a product is valuable, that it doesn’t have too much costs, and is expecting better returns for the client. To keep that on a product governance level would be a better thing.”
Asked about the proposed partial ban on inducements, ABBL believes that the EU needs to respect cultural differences between more remote regions in member states and recognise generally low levels of financial literacy among potential investors. In the respective, fragmented financial services markets across Europe, financial advisors play a different role, which needs to be considered, ABBL argued. Intermediaries in Luxembourg, like Belgium, France and Germany for example, still rely on inducements, while such kickbacks already have been banned under national laws in the UK and the Netherlands.
Financial literacy differences need recognition
“Low levels of financial literacy also means there is a real need for advice,” Rinck said. “The situation is different in remote areas compared to urban areas. It goes back to financial literacy in general. You cannot compare a rural area of France, Germany, or another country, with people living in a city, who are generally more aware of investments and finance.”
Members of the European parliament have until 26 October to table alternative amendments. Discussions between political groups then follow and may or may not lead to a compromise before the committee will vote in January.
‘The idea is good but how it translates in the text is not’
French MEP Stéphanie Yon-Courtin, from Normandy, is the European Parliament's rapporteur on the Retail Investment Package. In this central position she initiates and coordinates amendments and inform fellow MEPs where a consensus may be reached. As a French lawyer specialized in European business law she became MEP in 2019 on a ticket for the Renaissance party, part of liberal Renew Europe group.
IO question: Finance critics such as Better Finance and FinanceWatch argue that your report is basically a reflection of efforts by the finance lobby in Brussels. What do you make of this criticism? What is it in your view that makes your amendments good for investors?
MEP Yon-Courtin: “As you know we are facing time constraints with the European elections and we need to advance fast. This is why I have underlined that this report will be a work in process. I think we should not forget that I aim to amend my report in two phases, first with my draft report and second until the deadline for amendments end of this month.
“I have indeed removed the partial ban on inducements, because I don’t believe that a ban is the magic solution to all of our problems. This is even more relevant with the rise of digitalisation. Citizens want both online services and human advice.
“Enhancing the framework for me is done in a holistic manner by better framing financial advice. This where the value for money discussion comes in. The Commission introduced this very interesting concept of value for money. The idea is good but how it translates in the text is not.
“This is why I firstly introduced amendments to the best interest test in my draft report, to ensure a diversified product offering that suit the needs of each individual, and not only focus on the cost of a product. Because we all know that European consumers don't only focus on costs. Deciding to invest is a personal decision. For one, the determining factor will be cost, but for another it will be the ESG factors or guarantees linked to a financial product. And we cannot disregard this. Consumers must be presented with all the options that best suit their personal needs.
“Secondly, I removed benchmarks in my draft report, with the aim to restart discussions on this with a fresh perspective. This discussion will enable us to reintroduce a value for money framework that is the most effective to protect the citizens, as the original Commission proposal did not achieve that in my view.
“My draft report includes other elements that aim to protect citizens in their investment decision. I strengthen supervision by introducing an anti-forum shopping principle, I ramp up even more regulation on finfluencers to avoid misselling to consumers, and I include in the scope of the text data providers because if they are not regulated, the end consumer might suffer from a more expensive of less qualitative financial product.
“And on the rest I will still introduce amendment until the deadline for amendments.”
IO question: You will be a keynote speaker on 29 November at the European Parliamentary Financial Services Forum (EPFSF), a group that hosts industry meetings with MEPs funded by financial sector lobbyists. Some critics argue you are too close to the finance lobby in Brussels. What is your response to that?
MEP Yon-Courtin: “The European Parliamentary Financial Services Forum is a forum hosted by the European Parliament welcoming all citizens and market actors to be part of the discussion and ask questions. Therefore, as you can see, it is not ‘an exclusive lobby finance club’. I will indeed participate to the upcoming European Parliamentary Financial Services Forum's (EPFSF) event on the Retail Investment Strategy, as Rapporteur on this file.
“As an MEP, our duty is to serve all European citizens, and this means each actor of our market. This concerns as much citizens as companies. Hearing financial stakeholders out, does not mean adhering or adopting their position and it's quite important to make that distinction. I do want to underline that it is very important to have discussions with all actors (citizens, companies, NGOs, etc.) because only then we will find a legislation that works well in practice and serves the citizens right and I will carry on interacting with all these stakeholders.”
