Retail Investment Strategy must not reduce the range of products or dictate prices – The Commission’s proposal would further complicate regulation

The proposal overemphasises the costs of the products and services provided to investors at the expense of the quality and extent of advice offered to them. Image: Shutterstock
  • The European Commission’s Retail Investment Strategy (RIS) fails to tackle the main problems in retail investor protection regulation.
  • The proposed reforms would further complicate the investor protection framework, which is difficult to understand and inconsistent even as it stands.
  • The proposal overemphasises the costs of the products and services provided to investors at the expense of the quality and extent of advice offered to them. Higher costs can stand for higher quality.
  • A ban on inducements would not improve people’s understanding of financial products but rather lead to less investment advice being given to clients. The supervising authorities must not be given the mandate to regulate the prices.
  • As negotiations on the directive move along, Finland must ensure that sufficient negotiation latitude is allowed so that potential later regulatory options and national specificities can be accounted for.
  • One of the Finnish government programme’s principles is to avoid excessive regulation, also in the EU.

The European Commission is proposing restrictions on the commissions paid to banks and other investment product distributors for the sale of investment products. This would limit the ways in which the financial sector can arrange product distribution.

The Finnish Government took a stand on the Commission’s proposal in July and moved the matter to the Parliament to discuss. The proposal includes major issues, which the financial sector hopes the Parliament will address.

“The current extensive range of investment products is possible specifically because issuers can pay inducements to distributors. The proposed regulation would probably result in a reduced range of products and service providers in the market”, analyses Teija Miller, head of securities regulation at Finance Finland.

This could be the case especially when clients are independently choosing between investment products they are familiar with after having received investment advice. This is often the case with Finns, who are accustomed to using online services.

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. The proposed model would likely lead to price becoming the number one criterion in investment decisions, overriding things like risks and sustainable development.

The Finnish Financial Supervisory Authority has not observed any significant problems in retail investor protection in Finland. “Regulating prices is only justified if there is a severe market dysfunction, and there is no sign of such”, Miller points out.

Finance Finland’s stand is also supported by the study requested by the European Parliament’s Committee on Economic and Monetary Affairs (ECON), which states that rules focused on regulating prices may hinder the organic development of markets and that the focus should be the simplification of regulation and the quality of the assistance or advice provided to clients.

Sensible regulation is called for

Despite the problems in the Commission’s proposal, the financial sector supports the objectives behind the proposed regulation – it is just the choice of the proposed means that fails.

One of the real problems with current investor protection regulation is that it specifies the information that must be provided – and there is a lot of it – but it does not address the clarity and intelligibility of this information. Finance Finland believes this is an issue the reform should pay particular attention to.

“Retail investing must be promoted by tackling issues that research shows to be in the way of investment, such as low financial literacy and the overwhelming amount of information. Clear rules foster investor confidence and encourage participation in the capital markets”, Miller says.

Retail investors must have a good understanding of the products and services offered to them, and the information must be intelligible and comparable. This is something that must be ensured through legislation.

Legislation alone cannot solve all the problems related to retail investment, but what it can do is enable and ease – or block and obstruct – retail investors’ participation in the capital markets. Legislation should be simple and coherent instead of adding more layers and levels of detail to the already massive and fragmented regulatory framework. 

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