When the long wait for the retail investment strategy finally ended this afternoon at a European Commission press conference in Brussels, there were no big surprises. There finally will be no full ban on inducements. But Commissioner Mairead McGuinness gave the financial industry three years to hit her targets for transparency, costs and retail investor participation, or the ban will be back on the table.
McGuinness pushed back on industry allegations that the Commission had exaggerated the impact of inducements. “I think it’s very clear that the status quo is not acceptable,” she stated. “I think the fact that retail investors pay 40% more than other institutional investors speaks to an opportunity, in my view, to narrow that gap.”
“The industry, as I said publicly, recently,… they don’t get a get out of jail card here despite their protestations around inducements,” said McGuinness. “We’re going to be very active on this file, even as it goes through the process.”
She said that her office will set up meetings with “industry, consumer stakeholders” to reinforce this message. “We … give ourselves a timeline to see progress and change. And that is three years after adoption.” She described the timeline as “tight” and said, “industry should start working now.”
Controversial question
European Commissioner Executive Vice-President Valdis Dombrovskis, who’s also in charge of trade, described inducements as “a controversial question”. He continued, saying that “we have been receiving lots of feedback from industry, but also from consumer groups, NGOs,” he said. “So we had to look very carefully to strike the right balance.. He said this “was basically between availability of advice and ensuring that advice is not biased by the inducements.”
McGuinness explained that the full ban came off the table because “we have made the assessment very carefully that it will be too disruptive to have a ban overnight.”
Asked to specify what kind of disruption, Dombrovskis described it as “a question on availability of advice, especially if we talk of retail investors, which are not investing a huge amount of money, fees-based advice may be just too expensive for this advice to be provided.”
Potential win-win
McGuinness pointed to an eventual “win-win” situation. “Industry shares my objective, which is to get more people to invest because that will also help the industry.”
“What’s very clear is that we all know with better informed better-informed citizens who have been saving and not getting much return on savings, it’s an opportunity for them to get more for their hard-earned cash through investing with the appropriate advice.”
McGuinness emphasised the importance of this strategy to the future of Europe’s economy and linked it directly to the Commission’s Capital Markets Union project. “We will not have CMU if we do not have strong retail investors in the system.”
Financial sector change
McGuiness called directly on the financial industry by saying it “needs to start using the language and engagement that makes it inclusive of society.”
Throughout her remarks, McGuiness referred to the importance of financial literacy, describing it as a core issue for society. “Those who are vulnerable today, with the cost of living, need support around managing their finances,” she said, adding that “those who need access to finance often don’t get it or they pay more. In small ways, we can help with that by lifting the level of financial awareness right across the European Union.”
Asked to comment on the European Securities and Markets Authority’s recent proposal for EU-level legislation to ensure investors don’t bear costs that are considered excessive, unnecessary or unreasonable when they put their money into investment funds, McGuinness said: “The provisions on undue costs are currently included in Level 2 of Ucits and Aifmd.”
Undue costs rules
She noted that Esma has “highlighted the lack of convergence in the area of undue costs because there’s a lack of clear definition and clear empowerment at level 1 for this level 2 work. To answer this, she said that “the Ucits directive and Aifmd will define the conditions for considering that costs are due and provide rules in the pricing process to ensure that these conditions are met.”
The European Commission has today adopted the Retail Investment package. It will now follow the European legislative process.