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Retail investment – consumers investing in the opportunities offered by capital markets – is a cornerstone of the Capital Markets Union. Yet retail investment levels in the EU are lagging, hurting the financial prospects of households and businesses alike.
Through the recently proposed Retail Investment Strategy, the European Commission aims to change this. And while those expecting a sea change – particularly in the form of an inducements ban – might be disappointed, a closer look reveals a proposal with potential.
This follows on from a concerted effort to address (1) biased advice, (2) the lack of low-cost, non-complex investment products being offered and (3) the low comparability and comprehensiveness of standardised documents.
The proposal is vast, and contains much more, but these three issues are key to improving competition, lowering costs and increasing trust. Address them successfully and consumers will be enticed to move money from savings accounts to the markets, boosting retail investment levels.
The discussion around the Retail Investment Strategy is, and always has been, about inducements. Inducements – payments from a fund manager to a financial advisor, kickbacks if you will – incentivise the promotion of induced products, even when a non-induced product might be a better fit for the consumer. While the Commission’s retreat from a full ban might be seen as a defeat for the consumer, the pro-inducement camp should not celebrate too soon.
The Commission now proposes a partial ban paired with extensive new cost disclosure requirements and cost reporting obligations. The new cost disclosure requirements will require the exact inducement, as well as its impact on returns, to be disclosed separately from other costs, in addition to an explanation to the potential buyer of what exactly an inducement is. Currently this is not the case, hampering a straightforward cost comparison of induced and non-induced products and consumers’ overall understanding of the practice.
Fund managers and financial advisors would be obliged to report their inducement costs to the National Competent Authorities and the European Securities and Markets Authority (ESMA). This would allow supervisors to better understand how widespread the practice of paying inducements is, how high the charges are and what their impact on investors’ returns are. This is a significant change, as ESMA – by its own admission – is currently unable to quantify the impact of inducements in their costs reports due to having limited data on the practice.
Taken together, the new disclosure and reporting requirements will bring the opaque practice and the impact of inducements out of the shadows. While that doesn’t mean they’re banned, the increased scrutiny that inducements will receive from consumers and supervisors alike has the potential to improve competition and consequently lower the height of inducements.
And if that doesn’t happen, the Commission will be equipped with the data to make a strong case for banning the practice in three years once the Strategy’s review clause kicks in.
In short, industry shouldn’t celebrate the continuation of a lucrative practice too soon, and consumer organisations might well see their hopes for fewer and lower inducements materialise over time....
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