Strengthening the capital market union is a priority in Brussels. Recently, former Italian Prime Minister Enrico Letta published a report titled “Much More Than a Market.” Letta offered his insights to the European Council on how to proceed with the European capital market union.
In his report, Letta indicated that the mobilisation of private capital should be a priority for the capital market union. To this end, he calls for the creation of a Savings and Investments Union. Is this merely old wine in new bottles?
Savings and Investments Union
The idea of a Savings and Investments Union sounds promising. More private households should participate in capital markets and use their savings more for the benefit of the real economy. We’ve heard similar proposals before, such as in 2020 when the so-called High-Level Forum CMU working group released its report.
Four years later, this concept still resonates. However, Letta’s vision for the Savings and Investment Union remains somewhat unclear. He does propose some measures, such as promoting financial literacy, auto-enrolment for an EU Long-Term Saving Product, and a fiscally attractive European Long-Term Investment Fund (Eltif). However, these are variations on existing instruments or themes, and do not seem revolutionary. Thus, they may not be sufficient to justify the creation of a Savings and Investment Union.
Retail Investment Strategy
Regarding the Retail Investment Strategy (RIS), which the European Commission unveiled in 2023 as a response to calls for more retail participation in capital markets, Letta does not address it in his proposals. At the same time, the key question is whether the RIS package will indeed lead to more retail participation.
Will European savers be encouraged to invest? If we consider the focus of the RIS, the answer unfortunately seems to be no. Both European legislators and the financial industry appear to suffer from tunnel vision. The main topics of discussion are (parts of) the ban on commissions, the “Value for Money” concept, and benchmarking for investment products to assess whether they are overpriced.
While these topics are important and may contribute to greater investor protection, they are internal processes and are unlikely to make consumers more inclined to invest.
One promising element of the RIS that could enhance retail participation is the easing of knowledge tests for individual investors, just as the easing of intake obligations for distributors when providing investment advice or offering individual asset management. Currently, these obligations are too extensive and detailed, causing consumers to quickly drop out during an online advice intake. A less extensive intake process when investing small amounts in well-diversified investment products could improve the accessibility of (online) investment advice. However, this point seems to have been overshadowed by discussions around “Value for Money” and benchmarking. This could be a missed opportunity.
Silver bullet?
Neither the RIS nor Letta’s Savings and Investments Union appear to be the silver bullet. Both are focused on product regulation, and thus do not seem to be the right approach to increase retail participation in the capital markets union. More innovative and customer-centric measures need to be adopted to encourage consumers to invest.
Promising ideas
Are there no good ideas, then? On 11 April, the European Commission organised a roundtable with the financial industry and various stakeholders. At this event, Andreas Hackethal, a professor at Frankfurt’s Goethe University, presented some insights that included interesting starting points. For example, Hackethal suggested narrowing the skills gap of consumers by:
1. Increasing engagement: through auto-enrolment and standardised products.
2. Providing more transparency: through pension dashboards and the possibilities of open finance.
3. Providing more convenience: through simple and time-saving investment services and customised products.
4. Improving consumers’ judgement: by enhancing their ability to assess the quality and value of financial and investment advice. Digitised peer-to-peer financial education can help with this.
This approach seems more promising for strengthening the capital market union and promoting retail participation. It is important that both the European legislator and the financial industry take these insights seriously and work with them, instead of engaging in ‘trench debates’ around “Value for Money,” benchmarking, and whether or not to introduce a European commission ban.
Randy Pattiselanno is manager of strategy & regulatory affairs at Dutch fund and asset management association Dufas. This contribution originally appeared in Dutch on InvestmentOfficer.nl.