The European Commission this week proposed rules for EU retail investments that included partial bans on commissions and the benchmarking of products to help consumers compare the value of each investment fund.

The strategy aims to help retail investors by ensuring they are "treated fairly and duly protected".

The European Commission said the strategy would enhance retail investors' trust and confidence to “safely invest in their future and take full advantage of the EU's Capital Markets Union”.

Within the proposed rules are plans for more fee transparency and for protecting investors against misleading marketing on social media.

The Commission also intends to address potential 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 retail investors' best interests.

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

Positive elements

Trade body the European Fund and Asset Management Association (Efama) acknowledged “positive elements” in the strategy, including “the preservation of both fees- and commission-based distribution models, and comparable rules for all types of investment products”.

However, enforcing existing investor protection rules and avoiding information overload would be a good starting point to provide a more appealing consumer journey and better outcomes, said Efama.

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

How quantitative benchmarks – which are to be developed at a later stage by Europe’s financial regulator, Esma - would work in practice is not yet clear, Efama said.

Regarding a proposal to develop benchmarks to compare the value of products, Efama stressed that cost is only one of the many measurements of value, and there should be scope for factors like sustainability goals or income generation to be factored into 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 pressure group, welcomed the proposal to extend the ban on independent advice to insurance-based investment products and to ban inducements on execution-only sales of investment products.

However, this specific and limited ban on non-advised sales seems to apply de facto only to the small minority of MiFID-regulated products - essentially investment funds sold directly, the group said.

“The proposal allows member states to prohibit non-advised sales of the much more widely used life insurance and pension products. If the sale of ‘IBIPs’ [insurance-based investment products] without advice is disallowed, it would render the ban on inducements for non-advised sales of insurance-based investment products ineffective,” stated Better Finance.

The proposal fails to extend the prohibition of inducements for portfolio management services under MiFID to portfolio management services for IBIPs and pension products, it added. "Failure to address the consistency of investor protection rules across various categories of retail investment products leaves the conflicts of interest associated with portfolio managers receiving mandates from retail investors for IBIPs unresolved."

Michael Pedroni, chief global affairs officer and head of fund managers’ trade body ICI Global, hailed the proposal as “an opportunity for powerful reforms” amid inflation impacting the finances of EU citizens.

"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," said Pedroni, expressing support for the policy's attempt to "modernise disclosures through digitalisation, improve investor onboarding and suitability assessments, and provide a transparent presentation of costs”.

Underscoring that the EU should take a “holistic” approach to assess value for money, he cited ICI Global research that revealed the average ongoing charges for equity and fixed-income Ucits have declined since 2013.

"Reduced product diversity"

Expressing concern about the proposal mandating that the European Supervisory Authorities construct granular costs benchmarks against which all 30,000 Ucits would be evaluated, Pedroni considered it “unlikely” to be carried out “fairly” across a diverse 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.

Mairead McGuinness, Commissioner for Financial Services, Financial Stability and Capital Markets Union, said the proposals were the most ambitious legislative proposal since the inception of EU financial regulation.

“Europeans are good savers but less likely to invest, and this retail strategy aims to unlock the investment potential of savings. The best way to do this is to ensure they are better informed, get a fairer deal and are better able to meet their long-term financial objectives.”

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