The European Commission in May 2023 to encourage retail, or non-professional, investors to invest safely and to benefit from the EU’s capital markets. Amongst other goals, it aims to improve the way information is provided to retail investors, increase transparency and protect retail investors from misleading marketing.
The commission’s proposal is now being debated by the European Parliament and the European Council, and the European Fund and Asset Management Association (Efama) published on 27 November its (RIS). These include quantitative and qualitative value assessments across the whole value chain, maintaining and extending the existing quality enhancement test, avoid adding unclear or repetitive dashboards to investor disclosure documents, and setting a dynamic implementation deadline.
Claire Guilbert, investment management and investment funds lawyer at Norton Rose Fulbright, sat down with Delano to go into the details of the strategy and highlight key points.
“Alignment” between insurance and investment worlds
The first positive aspect about the proposed retail investment strategy is that there is such a proposal in the first place, began Guilbert. Retailisation--boosting the participation of retail investors--is a topic that a lot of people have been talking about over the past year, but it’s quite a complex process.
“You actually need an entire framework that is addressed to this type of investor, so that what you put in place as investment vehicles and products actually works for retail investors, but also for the manufacturers, the sellers and the managers of those products,” she said. “They also need to find their interests and be able to sell such products and address them to retail investors.”
It’s a dilemma with two sides, she added. What’s in the interest of investors may not necessarily in the interest of sellers. This strategy, therefore, is a good first step for solving this dilemma, said Guilbert.
There will be more alignment and retail investors will have access to more products and be able to compare them more easily
To have a solution that works for retail investors, it’s important to have a “solid and safe framework,” because retail investors don’t have the same understanding of the investment environment and investment industry that professional investors do.
“What I like with the strategy is that, first, it addresses both investment products under Mifid [Markets in Financial Instruments directive] and insurance products under the directive on insurance distribution [IDD],” said Guilbert. “There will be more alignment and retail investors will have access to more products and be able to compare them more easily.” Selling the products will also be easier.
“For now, the insurance world and the investment world are very separate. You’re subject to two different rules and disclosures, on suitability and appropriateness assessments, eligibility requirements, etc. So there will be some kind of harmonisation and alignment and that’s a very good thing.”
Improving financial literacy
Another positive point in the strategy concerns disclosures and making financial terms more understandable, Guilbert explained. “There are provisions to improve financial literacy, to improve the way to disclose information, also addressing the digitalisation that we are facing and trying to make the most of it.”
Distribution means and digitalisation is where “there is definitely a card to play.” Say there is a digital platform ready to sell a product. “If the assessment and disclosure are facilitated, banks will see more interest in accepting to sell those products also to retail investors,” said Guilbert.
Benchmarks difficult to implement
Addressing the question of “value for money” is also a good thing, noted Guilbert. But “at the same time, the way it is currently addressed I believe is not appropriate, not adequate to the alternative investment world or towards the investment world, generally speaking.”
Efama has the same view, she added, referring to the association’s recommendations on the retail investment strategy. Efama is against quantitative “value-for-money” benchmarks as these focus only on (undue) cost, go too far towards market price setting and dis-incentivise research and fund innovation, the industry group noted in its recommendations.
“It actually follows the feedback from the European Commission’s rapporteur, that the proposals around undue costs, around ban of inducements, around disclosures on costs that have been actually borne; it therefore requires a much bigger role from the distributors and financial advisors in assessing whether those costs are justified are not--and this goes too far,” said Guilbert.
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“There are so many different elements that come into play to determine the cost of a service that I don’t even see how this is possible to set a benchmark,” she added. As an example, the infrastructure and regulatory regime of a fund in Luxembourg is different than that of a fund in Malta, so the costs will be different. These can, for instance, depend on the size of the fund and the track record of the fund manager.
The commission’s benchmark would be very difficult to implement and have an impact on the competition in the market, Guilbert added, with certain players unable to continue to operate in the industry. It’s a point that “absolutely” needs to be addressed.
More transparency, but also more thought
“I believe the solution will be rather around more transparency on costs,” she noted. There are multiple costs that come into play, including many that managers don’t have control over. “Ultimately, it’s very difficult to have a granular view on every single cost that has been borne throughout the structure,” said Guilbert. “If you have to separate them cost by cost, line by line, that’s quite difficult.”
Going forward, more transparency will be key. But this will require more thought and discussion, she added. “Otherwise, we really risk killing the small managers--the smaller players--because the cost of operations is going to be too high, and it’s not going to be worth addressing or targeting retail investors.”
“Worth taking the time”
Once the European Parliament’s economic and monetary affairs committee finishes discussing the European Commission’s proposal, they will vote on it, something that will probably happen in early 2024, said Guilbert. An amended version of the report will then be issued and discussed, and stakeholders and EU member states will provide feedback. In Luxembourg, for example, the fund industry association will likely provide its input.
Given the impact on so many different key regulations in Europe, I really think that it’s worth taking the time to make sure we do it right
The European Securities and Markets Authority (Esma) has also issued a consultation on undue costs related to the retail investment strategy, as well amendments to the Alternative Investment Fund Managers Directive (AIFMD), she added.
EU-wide elections for the European Parliament will take place in June 2024, however, and Guilbert noted that she would be surprised if the final text was approved before the elections next year. “Given the impact on so many different key regulations in Europe, I really think that it’s worth taking the time to make sure we do it right.”
For Guilbert, the biggest risk is that “we lose the interest of asset managers, distributors, manufacturers of products and of market participants in general, and that they don’t find an interest in selling their products to retail investors because it is too much of a burden and not lucrative enough.” And that would be a pity, given the efforts being taken to open the world to retail investors. It will be key to find a way to both protect investors and enable manufacturers to continue to do business in a meaningful and fee-earning way, she said.
“Big players are interested; they can afford it, they have large operations, they have the infrastructure that is sufficient to address retail,” said Guilbert. On the other hand, distribution channels need to be facilitated for the small and mid-market players, but it will also be important not to put too much burden on distributors.
“And here in the current proposal for the retail investment strategy, there are several measures that are not helpful to encourage distributors,” she said. Although the EU commission’s proposal addresses retail investors, “it requires the involvement and efforts from all the participants in the value chain--and we should not forget them.”
Tanguy van de Werve, Efama director general, made a similar point in the industry association’s accompanying its recommendations. “If we want to increase retail participation in capital markets, the debate around the retail investment strategy should focus on more than just commissions and costs. We need to talk about creating value for investors, assessing their different needs and goals, and looking across the entire investment value chain.”
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .