The European Securities and Markets Authority (Esma) unveiled a new initiative this week aimed at making investment opportunities more accessible across the EU. At the heart of this plan is a new «basic and simple» EU investment product label, intended to simplify and streamline choices for retail investors.
The voluntary label would be applied to non-complex financial instruments, including basic Ucits funds and straightforward equity and debt securities, chosen for their simplicity and cost efficiency. The EU label would be prominently displayed in all client interactions, guiding less experienced investors towards these offerings. Ultimately, Esma said, investors would make their final choices based on their risk appetite, ensuring a more tailored and accessible investment process.
The EU label is one of 20 potential steps that Esma has presented in its contribution to the renewed EU discussion on the future of capital markets. That debate kicked off last month with the presentation of a report by former Italian prime minister Enrico Letta. Once the political dust has settled on the upcoming EU elections, steps towards a specific proposal are due to materialise in the coming years. Esma’s suggestions will first have to be taken up by the next European Commission before they become an official EU proposal.
The rationale behind the Esma proposal is clear: many EU households currently rely heavily on bank deposits, which offer limited returns and may not keep pace with inflation. By providing a clear and accessible gateway to capital market investments, Esma aims to encourage more citizens to shift their savings into instruments that can offer better long-term growth potential. This shift could unlock substantial liquidity, enhancing the overall efficiency and resilience of EU capital markets and giving companies more financing options.
‘Trust and Confidence’
Esma chairperson Verena Ross told journalists the label would help investors easily identify simple, cost-effective products that can be sold with less need for extensive advice and information typically required for other products. Creating an official “simple” advice category for basic investment products is part of the proposal.
“We feel that this would also give trust and confidence to investors that do not have the time or the willingness to necessarily engage so much in the process of investing and choosing specific products, so that they can find a product that suits them for their long-term saving needs,” Ross said.
Addressing the wide differences in tax treatments on investments across the EU is another topic close to Esma’s heart when it comes to unlocking the potential of the fragmented EU capital markets. Responding to a question by Investment Officer, Ross called on national governments and finance ministers to re-evaluate tax incentives for retail investors.
In the EU, taxation is still a topic left to the discretion of national governments, which has contributed to significant fragmentation in financial markets. Cross-border investments within the EU still face challenges in recovering unduly withheld taxes on dividends from investors in other EU countries, and certain types of financial products, such as long-term investment products, are attractive in certain markets due to different tax benefits.
“It is something that needs to be addressed at national level, obviously, but there can be coordination and common sharing of best practices and experiences that can be really beneficial,” Ross said.
Modernising market supervision
Modernising the EU’s regulatory framework for financial market supervision is another recommendation Esma included in its paper. Esma has become more outspoken in the last year on the need for more supervisory consistency and now also suggests that further centralisation of supervision at the EU level should be assessed.
Ross hinted at the possibility of creating a system that includes direct EU-level supervision of major international asset managers, modelled on the way the EU now arranges its tighter supervision of the banking sector, with the ECB in a direct supervisory role for the largest banks.
“Regulatory consistency is particularly important where regulation, supervision, authorisation and enforcement are conducted at national level, which is likely to be the case for the majority of financial services firms in the foreseeable future,” Ross said. “Even if we need to evaluate direct supervision at EU level for certain sectors, we must assess together with national authorities the need to continue working proactively on driving further convergence and consistency.”
Employee share ownership
Esma’s position paper “Building More Effective and Attractive Capital Markets in the EU” presents a range of strategic ideas to bolster the EU’s capital markets, focusing on inclusivity, efficiency, and global competitiveness. Key recommendations include supporting digital solutions to make market products more accessible and evaluating national pension systems to boost individual market participation.
Promoting employee share ownership schemes and developing pan-European market segments are designed to diversify funding sources and reduce reliance on traditional banking. Stimulating equity funding for innovation growth is also crucial to integrating and expanding capital access.
The paper further advocates for revitalising the EU securitisation market and enhancing trading and post-trading connectivity to improve market liquidity and efficiency. It calls for creating a supportive ecosystem for public companies. Promoting the EU as a green finance hub aligns with global sustainability trends.