Thursday, April 26,
2018 06.57AM / Better FINANCE
Yesterday the European Commission
released the results of its study on the current features and functioning of
the European market for retail investment products[1].
BETTER FINANCE thanks the EC for
releasing this long awaited but very necessary study on the main source of
funding of the EU economy, which for this reason has also been identified as a
top priority of the “Capital Markets Union” Initiative of the EU.
The study draws a grim picture
detailing the obstacles retail investors face when seeking financial advice or
wanting to buy an investment product.
However, this study is limited in its
findings by the very limited availability and comparability of costs and
charges of the retail investment products (therefore mostly focusing on
investment funds which represent only 8% of EU households’ financial savings),
and the fact that consumer and individual investor organisations were not properly
consulted. Also, the study was conducted in 2017, i.e. before significant
regulatory changes - e.g. MiFID II, PRIIPS, IDD - entered (or will enter) into
force.
Retail
investment products
The EC study confirms what BETTER
FINANCE has been stressing for years:
An average individual investor is
overwhelmed by the sheer complexity of, and uncertainty associated with, the
investment products available. The information on distributors’ websites is not
really transparent and not at all standardised across products and countries.
As regards costs and charges some distributors either don’t display this
information at all or present it only partially.
Therefore, it is difficult for
individual investors who are not financially savvy to find, understand and
compare this information in order to make an informed investment decision and
choose a suitable product. This confirms the urgent need for independent and
cross-border comparison websites that support retail investors in finding the
right and most suitable investment product.[2]
Not surprisingly, the situation is
different in the UK and in Netherlands, where inducements have been banned. In
these Members States, individual investors are systematically redirected by
banks and insurers to Independent Financial Advisors and distributors present
the lowest ongoing charges of all types of funds. Consequently, local investors
have become more cost-sensitive and better informed about investment products.
The EC study confirms that there are
large differences in terms of costs of retail investment products across Member
States and that fees for the same category of investment products vary
substantially across Member States. Also, in general, low cost ETFs were
rarely proposed by “human” advisors but are predominant among robo-advisors.
Advice
provided to individual investors
The EC study confirms BETTER FINANCE’s
findings, i.e. that investment products are not bought but sold, and that an
average individual investor is not able to differentiate between the benefits
and risks of different types of advice. Individual investors and savers have
been crowded out of equity markets and pushed into fee-laden and too often
under-performing "packaged" investment products (see for example the
BETTER FINANCE Report on long term and pension savings 2017 here). In fact, the study confirms that an average retail
investor seeking personal advice would tend to go to non-independent advisors
via banks and insurers (believing it’s “free” advice and being unaware of
incentive schemes and potential conflicts of interests) and end up with
relatively similar investments “recommendations” across Member States in terms
of product types, i.e. in-house investment funds and life insurance policies. FinTech
solutions
The study acknowledges that the
potential for new distribution models based on FinTech is promising but still
needs to be monitored carefully.
BETTER FINANCE believes that
robo-investing platforms could lead to significant benefits for EU citizens[3]as
savers and individual investors - and therefore to the real EU economy as a
whole - who are in bad need of a more direct and stronger link between savings
and the real assets they are invested in. Already now the emerging sector is
charging significantly lower and more transparent fees with few or no
commissions from providers. However, these platforms still deal with products
and services that require clients to be relatively financially literate to
really understand the value of their offers.
Guillaume Prache, Managing Director
General of BETTER FINANCE stated that “BETTER
FINANCE again calls on EU Authorities to fulfil their legal duty to promote
simplicity and transparency of investment products as well as to follow up on
their “consumer
financial services action plan”[4] released in
2017 and go beyond the non-binding “Key Principles for Comparison Tools”. The
study released today confirms that EU citizens are in dire need of comparable
information on past performances relative to the objectives of the providers
(their “benchmarks”), and on costs. It should be accessible via independent
web-based comparison tools for retail long-term and pension investments. BETTER
FINANCE is ready to contribute to this process, since this constitutes a major
challenge for EU citizens as long-term savers, for the Capital Markets Union
initiative, for the EU economy and for the adequacy of our pensions”.

Footnotes
[1] Study
on the distribution systems of retail investment products
[2] Please
see page 25 of BETTER FINANCE’s response to the EC consultation document
on the CMU Action on the cross-border distribution of funds
[3] BETTER
FINANCE’s 2017 Robo-Investing Report
[4] The
EC’s Financial Services Action Plan
Contact: Chief Communications Officer ǀ Arnaud Houdmont ǀ +32 (0)2 514 37 77 houdmont@betterfinance.eu

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