By Mirzha de Manuel Aramendía, Director of Capital Markets Policy
Five years since the start of the financial and economic crisis, the European Union is only now finalizing the long-announced reforms of its legislative framework in the field of investor protection. As the European legislature comes to a close, the time is right to make an assessment of the state of investor protection and regulatory reforms in Europe. To aid this endeavor, CFA Institute recently supported and took part in the "Better Finance Manifesto" conference, organized by the European Federation of Financial Services Users (EuroFinUse).
Held at the European Parliament in Brussels, the event featured top experts, politicians, regulators and representatives of investor associations. Three key conclusions were reached:
- First, there has been insufficient attention afforded by policymakers to investor protection over the past four years.
- Second, there are likely to be significant changes when recent and soon-to-be approved rules enter into force.
- Finally, investors need to be placed at the center of the equation for promoting long-term investing and growth in Europe.
Investor protection should be top concern for next European legislature - Pervenche Berès, member of European Parliament
Keynote speakers and members of European Parliament (MEP), Pervenche Berès and Philippe Lamberts, commented that consumer protection has taken, at best, second or third place during the current European legislature, which is now coming to a close. Most of the time policymakers were dedicated, to restoring financial stability and strengthening the institutional setting of the euro area, including the creation of a banking union.
However, investor protection and financial stability are closely linked. The collapse of the complex hybrid instruments sold to unsophisticated investors was cited as an example of the feedback loops between user protection and macro-prudential supervision. In several EU countries, retail investors were caught in the bail-in of failing banks through their holdings of these instruments, which had been issued by banks to help meet prudential capital requirements.
Lamberts stated that the benefits of financial stability have not been equally distributed, but have been more favorable to large-scale creditors than to taxpayers. He urged, in this respect, to restore the price tags for the funding of riskier activities by eliminating cross-subsidization from deposit-taking and to remove implicit guarantees of future bail-outs to avoid any future socialization of losses for institutions that keep their profits private.
Berès, in turn, urged fellow policymakers and industry leaders to treat retail investors as citizens and not only as consumers. She cautioned against legislation that could unintendedly promote complex products over simpler ones and exhorted more transparency on the treatment given within each product to environmental, social and governance factors (ESG) so that investors are empowered to choose.
Reform is coming late but its effects for investors will be significant - Josina Kamerling, head of regulatory outreach for CFA Institute, EMEA
Event panelists acknowledged the significant delay in the investor protection legislation, notably in the introduction of a key information document (KID) for investment products and the reform of origination and sale practices through the Markets in Financial Instruments Directive (MiFID II) and the Insurance Mediation Directive (IMD II).
Speakers collectively urged the implementation of investor protection reforms, which will increase transparency and accountability and expand the powers of supervisors. In his keynote speech, Steven Maijoor, chair of the European Securities and Markets Authority (ESMA), explained the new setting by referring to four aspects: disclosure, origination, advice, and supervision.
- Disclosure: Maijoor praised the merits of the KID in extending one standard of pre-contractual information across instruments, regardless of their legal form or distributor. He cautioned, however, that disclosure alone has proved insufficient to combat mis-selling.
- Origination: Manufacturers will need to identify and review the target market for their offerings and assess the consistency of their distribution strategies with respect to the complexity of the product and sophistication of the market.
- Advice: The ban on inducements when the distributor chooses to use the label "independent advice" should make this form of advice more easily identifiable for investors.
- Supervision: Supervisors will have the ability to introduce limitations to the distribution of investment products (including bans) in a narrow set of circumstances, which Maijoor described as a tool of last recourse - a power that will not need to be used frequently to incite market discipline.
John Purvis and Margarita Starkevičiūtė, former MEPs, both insisted on the importance of clearly communicating to investors the full costs of the products and services on offer, together with a clear representation of the cumulative impact of these costs over time - compared to the potential returns, and with an explanation of the key risks, so that investors can make informed decisions.
What remains is to steer funding to the financing of the real economy - Steven Maijoor, ESMA chair
Olivier Guersent, head of cabinet for Michel Barnier (European Commissioner for Internal Market and Services), referred to the more than 30 regulations and directives that the European Commission has proposed in the field of financial services. The next four years will be the time to observe all these measures working on the ground and to propose fixes and fine-tuning where needed.
Looking forward, assuming that the most immediate concerns for financial stability and investor protection have been largely dealt with already, the next challenge is to ensure that financial markets effectively contribute to further progress among economies and societies. Participants agreed on the need to reinstate the long-term orientation and productive function of finance, for which they felt that additional and fundamental reforms will be needed.
With a focus on the promotion of capital markets and investor interests, Maijoor highlighted that, while household savings in Europe are abundant (in excess of €260 billion), they are mostly held in deposits. In his view, this funding would be better steered into the financing of the real economy through direct markets and institutional investors within an efficient framework to protect end users and investors.
The recently published roadmap to meet the long-term financing needs of the European economy sets the ground for legislative and other actions in the coming legislature to develop capital markets, improve corporate governance, promote shareholder engagement and create a pan-European market for personal pensions in which end users and investors are both protected and empowered.
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