30 July 2021

BEUC: PUBLIC CONSULTATION ON A RETAIL INVESTMENT STRATEGY FOR EUROPE

Consumers often rely on financial advice when investing into investment funds, lifeinsurance policies or pension products. Unfortunately, the current legal frameworkgoverning financial advice in the EU does not adequately protect them

  Why it matters to consumers

The low quality of financial advice has been documented widely, and the investment recommendations
given by financial advisers are often not in the best interest of their clients. The payment
of inducements by fund managers and life insurers to financial advisers leads to conflicts
of interests that have played a key role in many recent mis-selling scandals. The EU
should implement an EU-wide ban on the payment of inducements to financial advisers,
modelled on similar reforms already implemented in the UK and the Netherlands.

Summary

BEUC welcomes this opportunity to provide input to the European Commission’s public
consultation on its Retail Investment Strategy for Europe. Efforts to increase the
participation of retail investors into capital markets must be underpinned by stronger
efforts to ensure that consumers can have confidence in the financial advice that is given
to them. At the same time, consumers are also becoming increasingly more aware of the
serious environmental, social and economic risks that are arising from climate change, and
further measures are needed to help consumers when choosing between sustainable
financial products. We offer the following main recommendations to the European
Commission for it’s Retail Investment Strategy:

Banning the payment of inducements: Commission-based financial advice, where
advisers are remunerated by product manufacturers for recommending specific financial
products to consumers, puts a conflict of interest at the heart of advice. The payment of
inducements to advisers have played a key role in many recent mis-selling scandals
and leads to biased financial advice. To ensure that advice to consumers is in the best
interest of clients, the payment of inducements for advice on retail investment
products should be banned. Studies carried out in the UK and the Netherlands show that the commission bans in these countries have reduced conflicts of interests for financial advisers, and encouraged the distribution of simpler and lower-cost investment products to consumers. For instance, a study by the UK Financial Conduct Authority (FCA) found that while as much as 60% of
British fund savings were injected into the most expensive funds prior to the UK
inducement ban, this proportion had fallen to 20% almost two and half years after the ban
came into place. In the absence of a full ban, BEUC supports several measures to improve
outcomes for consumers:

• Full alignment between inducement rules under MiFID II and the Insurance
Distribution Directive.
• Stricter enforcement and enhanced supervisory convergence of the quality
enhancement criteria, including a requirement for ESMA to carry out a mandatory
peer review into the quality enhancement rules under MiFID II.
• A ban on the payment of inducements in case of execution-only sales.

Training and qualification requirements for financial advisers: Financial advisers
should be adequately trained in order to be able to give suitable investment advice to
consumers. BEUC supports mandatory minimum professional qualification requirement for
intermediaries providing financial advice. Financial advisers will soon also be required by
EU law to assess the sustainability preferences of clients when giving financial advice.
However, research shows that most financial advisers are currently untrained about
sustainability issues, despite these looming rule changes. BEUC believes that all financial
advisers should be adequately trained and knowledgeable about sustainability matters,
and ESG training should be mandatory for all advisers under the IDD and MiFID
II. In addition, the European Supervisory Authorities should be required to develop
guidance and/or template questionnaires to assist advisers in adequately assessing the
ESG preferences of their clients.

Better sustainability disclosures: There is a significant need to improve sustainability
disclosure in the Key Information Documents (KIDs) that are provided to retail investors.
All retail investment products, including investment funds, pension products and life
insurance policies should be required to disclose in a simple and standardised way
how sustainable they are to retail investors. For example, simple disclosures could
provide an indication about whether the fund is aligned with international climate scenarios
such as a Paris-compliant 1,5°C or well below 2°C pathway, or is heading towards climate
chaos above +4°C. Alternatively, a coloured rating system similar to the well-known
energy label (where a dark green category A is the most sustainable, while a red G category
is considered the least sustainable) should in future be provided to consumers when taking
investment decisions.

BEUC

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