Commission prohibitions are being discussed as part of Europe's retail strategy

The European Commission proposed guidelines for EU retail investments this week, including partial commission prohibitions and product benchmarking to enable customers assess the value of each investment fund.

The plan seeks to assist retail investors by ensuring that they are "treated fairly and adequately protected."

According to the European Commission, the approach would increase retail investors' trust and confidence in order for them to "safely invest in their future and fully benefit from the EU's Capital Markets Union."

The proposed rules include efforts to increase fee transparency and safeguard investors from misleading social media marketing.

In addition, the Commission wants to address any conflicts of interest in the distribution of investment products by "banning inducements for execution-only sales - where no advice is provided - and ensuring that financial advice is aligned with the best interests of retail investors."

“Stricter safeguards and transparency will also be introduced where inducements are allowed,” said the Commission in its statement.

Positive aspects

The European Fund and Asset Management Association (Efama) praised the strategy's "positive elements," which included "the preservation of both fees- and commission-based distribution models, as well as comparable rules for all types of investment products."

However, Efama believes that implementing existing investor protection standards and avoiding information overload would be a good place to start in order to create a more appealing customer journey and better outcomes.

"Care should be taken not to unduly increase the complexity of disclosures and compliance for little gain."

It is unclear how quantitative benchmarks, which will be developed later by Europe's financial regulator, Esma, would work in practise, according to Efama.

Concerning a proposal to create benchmarks for comparing the worth of products, Efama emphasised that cost is only one of many measures of value, and that there should be room for elements such as environmental goals or income generating to be considered in the assessments.

Tanguy van de Werve, director general of Efama, said: “Each policy initiative proposed needs to have a strong rationale, with the impact for end-investors and the competitiveness of EU capital markets clearly understood."

Thomas Richter, CEO of the German investment funds association BVI, said: “On the good side, retail investors will keep access to a wide range of advice. They can easily carry on benefiting from the opportunities of the capital markets and build up private old-age provisions.

“However, we oppose the commission ban in respect of non-advised sales, as well as the additional requirements regarding commission-based advice. These measures will not further increase the current level of investor protection, which since MiFID II is already very high."

"Ineffective ban"

Better Finance, a consumer advocacy group, applauded the plan to expand the prohibition on independent advising to insurance-based investment products and to prohibit inducements on execution-only sales of investment products.

However, the group claims that this precise and limited limitation on non-advised sales appears to apply de facto only to a small percentage of MiFID-regulated products - effectively investment funds marketed directly.

"The proposal allows member states to prohibit non-advised sales of life insurance and pension products, which are much more widely used." If the selling of 'IBIPs' [insurance-based investment products] without advice is prohibited, the ban on inducements for non-advised sales of insurance-based investment products will be rendered useless," according to Better Finance.

According to the proposal, the limitation on inducements for portfolio management services under MiFID does not extend to portfolio management services for IBIPs and pension plans. "Failure to address the consistency of investor protection rules across various categories of retail investment products leaves conflicts of interest associated with portfolio managers receiving mandates from retail investors for IBIPs unresolved."

The plan was praised as "an opportunity for powerful reforms" by Michael Pedroni, chief global affairs officer and chairman of fund managers' trade association ICI Global, amid inflation affecting EU members' budgets.

"Investment fund products, such as Ucits, offer retail investors market-based returns that can often outpace bank deposit accounts and work to achieve financial goals," Pedroni said, expressing support for the policy's efforts to "modernise disclosures through digitalization, improve investor onboarding and suitability assessments, and provide a transparent presentation of costs."

He referenced ICI Global research that demonstrated average ongoing charges for equity and fixed-income Ucits had dropped since 2013. He emphasised that the EU should use a "holistic" approach to assessing value for money.

"Reduced product diversity"

Pedroni expressed concern about the plan requiring European Supervisory Authorities to create detailed cost standards against which all 30,000 Ucits would be reviewed, calling it "unlikely" to be carried out "fairly" across a varied range of asset classes and time horizons.

"Price benchmarks would reduce diversity, innovation, and choice of funds offered, leading to worse outcomes for European investors," he added.

The ideas, according to Mairead McGuinness, Commissioner for Financial Services, Financial Stability, and Capital Markets Union, are the most ambitious legislative measures since the start of EU financial regulation.

"Europeans are good savers but less likely to invest, and this retail strategy aims to unlock savings' investment potential." The best way to accomplish this is to ensure that customers are more informed, receive a better bargain, and are better able to reach their long-term financial goals."

By fLEXI tEAM