EU regulation must take into account investors’ needs – yields, risks and sustainability matter more than prices

The European Commission is updating the regulation on retail investor protection to better meet the needs of consumers. This work is proceeding from the basis of the Retail Investment Strategy (RIS).

In its programme, the Finnish Government is committed to promoting Finland’s national interests and enhancing Finland’s ability to exercise influence within the EU. Any EU-level decisions that impact Finns must be just and proportionate and take into account Finland’s national specificities and needs, and the same must come true with the RIS review.

When investors are making investment decisions, they consider factors such as risks, sustainable development goals and yields of the investment. Price is only one facet of the whole. It is therefore strange that the Commission’s proposal on investor protection puts so much emphasis on the costs of an investment and the restriction of such costs.

The Commission’s rationale is that the proposed measures would reduce direct expenses and turn them into direct profit for the customer. There is no reasonable proof of such effect. In reality, overemphasising costs and price comparison may reduce the range of products and services in the market so that the remaining products have been primarily selected based on costs and do not necessarily suit the investment needs of an individual customer. For a retail investor, the cheapest option is not always the best one. Even very simple and low-cost investment products may carry a great risk.

The Finnish Parliament’s Commerce Committee points out that a reduction in the range of products and service providers would weaken competition and dampen the attractiveness of the capital market from the retail investor point of view. It is important to ensure that the content of the regulation is such that it does not materially reduce the variety of products available to retail investors or subdue competition.

Furthermore, the Commission proposes that supervisors would be given the mandate to develop benchmarks that define the range of acceptable costs on a product-by-product basis. This borders on price regulation.

Actively managed and sustainable investment products can well be priced higher because they provide additional value to the customer. Placing too much emphasis on costs can drive investors away from such products and into simpler, low-cost investment products. In reality, rather than track the performance of equity and bonds markets on their own, many retail investors prefer to pay a service provider to handle the diversification and risk calculations of their investments.

The Commerce Committee and the Finnish Financial Supervisory Authority have both taken a firm stance against the Commission proposal, as they should. In future negotiations, Finland should see to it that the measures to improve the position and confidence of retail investors genuinely promote the functioning of the market and also encourage innovation and sustainable finance investment. In practice, this will entail amending the Commission’s original proposal.