In May, European commissioner for financial services Mairead McGuinness that seeks to make it safer for EU citizens to invest in the long term and encourage their participation in EU capital markets.
But European industry groups have , warning that some measures could severely disrupt Europe’s financial sector. The most controversial aspects of the proposal include a ban on inducement payments for so-called “execution-only” sales and a quantitative “value for money” benchmark for investment products.
In a recent report, EY said such price regulation could be a threat to the democratisation of private markets. “When private asset managers are prescribed to charge lower fees this could impact their interest in sourcing retail investor money, which in turn leads to even less choice for retail clients”. The report also said price regulation could reinforce the trend to passive investment strategies while adding pressure on actively managed investments.
One of the European Commission’s goals is to reduce how much retail investors are charged for investment products. According to the European Securities and Markets Authority, retail clients in Europe pay on average around 40% more for investment products than institutional investors across asset classes. But Benjamin Accadia, a partner at EY, warned the industry the commission’s focus on lowering costs could compromise performance and asset diversification. “Just because you offer the lowest cost it does not necessarily mean you will get the best value for money and the retail investors’ needs and preferences will be met. This could lead to orienting investments towards certain funds that are not necessarily aligned with the objectives of the clients.”
Read also
Elisabeth Ottawa, head of public policy for Europe at Schroders, said the commission was looking at investment products through a cost lens and urged them to take a broader view. “What they are proposing is only looking at costs. But when you look at an investment, fees are only one dimension. You need to look at in a more comprehensive way. You need to see what the fees are compared to the performance you get.”
Next to the sustainable finance agenda this is the biggest policy package from the commission. It could have a huge impact on the asset management industry.
Catching up with the US and UK
The retail investment strategy is high on the European Commission’s list of priorities, according to Ottawa, who is based in Brussels. “Next to the sustainable finance agenda this is the biggest policy package from the commission. It could have a huge impact on the asset management industry. The consequences--intended or not--are not yet fully clear, but there are elements in it would mean quite a change.”
Ottawa said the Commission is determined to bring more retail investors into capital markets. In 2021, approximately 17% of household assets in the EU were held in financial securities, such as shares, bonds, mutual funds and financial derivatives. In comparison, households in the US held around 43% of their assets in securities. “Compared to the United States and the United Kingdom, retail participation in capital markets in Europe is very low. There’s a significant portion of money sitting in savings accounts and that is not particularly attractive for the financing objectives of individuals,” she said.
Risk of creating an advice gap
The European Commission’s ban on inducements is another sticking point. Initially, the commission wanted to fully ban incentive payments to remove conflicts of interest and protect consumers, but it soon backtracked on its plans and proposed limiting the ban on inducement payments to so-called “execution-only” sales. Ottawa said that while countries like the United Kingdom enforced a ban on inducements, the distribution market in Europe didn’t have a vibrant advisory sector like in UK. She warned an inducement ban could force retail clients to pay for investment advice in the future, reducing their access to investment products. “The impact of an inducement ban on the European market would be drastic. There is a risk that you will create an advice gap and a bias for in-house products.”
Accadia said not all EU countries will be affected equally by a ban on inducements. “Countries with a huge retail market, like Germany and France, will feel the impact of an inducement ban differently than say Luxembourg, which largely serves wealthy clients that are more willing to pay for advice and be guided through the complexity currently observed in the financial markets.”
Accadia said he still expects the inducement ban to impact Luxembourg’s fund industry. “There will be an impact on the revenue and service model in Luxembourg, between execution services, advisory services, portfolio management services, and how they are priced. We can anticipate an evolution of the service mix, accompanied by a move away from inducement-based remuneration to more fee-based remuneration.”