The Association for Financial Markets in Europe (AFME) has outlined its concerns with the European Commission’s Retail Investment Strategy (RIS), with some of the proposals deemed to be overly prescriptive.
AFME drew particular attention to proposals that may have an unintended, negative impact on wholesale capital markets and on the broadening of choice for retail investors.
Adam Farkas, AFME CEO, said: “AFME strongly supports the Commission’s objective of making the distribution of securities to European retail investors more efficient. We also support the Commission’s ambition to significantly raise the percentage of European retail investors’ direct and indirect participation in EU capital markets.
“However, in view of the fact that a significant number of investment products distributed to retail investors are sourced and manufactured by wholesale banks, asset managers and insurers, AFME is concerned by the many ways that the RIS could impact wholesale capital markets, as well as the availability of investment product for retail investors, reducing rather than enhancing their choice.
“AFME believes that alternative approaches, including those used in other jurisdictions, should continue to be carefully explored based on their success to ensure the effectiveness of the proposals.”
AFME said a more qualitative, outcomes-based approach, or an approach that allowed for flexibility between quantitative and qualitative factors, would be better suited when devising a way to measure value for money for retail investment products.
The Commission is keen to increase transparency and make it easier to compare costs via standard presentation and terminology.
But AFME warned that the value of a product or investment leans on many factors, such as quality of service or sustainability features, which may not be reflected in a prescriptive benchmark.
Similarly, AFME said the Commission’s proposal to revise existing Best Interest requirements in the MiFID inducements rules is an approach towards investment advice that is too focused on costs. The proposals also impose “a significant burden” on firms and seem to be duplicative of the value for money proposals, the group said.
This approach risks “downgrading” the value of the investment advice as a whole, AFME warned, and advisers may steer retail clients only towards the lowest cost products which may not always lead to best investment results for retail clients who may be looking for best overall returns over the long term.
Regarding the inducements ban for non-advised services pertaining to packaged retail and insurance-based investment products (PRIIPs), AFME said the scope and rules require further adjustments to ensure that they do not cast the net wider than is required to meet the Commission’s stated objective in this area.
AFME suggests a review of the strategy should occur five years, rather than three years, after the amendments have been in place and should consider the “whole package” rather than the adjustments and amendments in isolation, with “clear criteria” for measuring the effectiveness of the strategy.
Lastly, AFME said it welcomed measures designed to allow experienced retail investors to ‘opt up’ to professional client states, which could result in an increase of capital being made available to issuers in EU capital markets.
However, the ‘opt up’ criteria must be clearer and based on evidence that demonstrates financial expertise.
The EU’s retail investment strategy, released in May, is an attempt to harmonise investor protection rules which are currently set out across sector specific legislation, and boost Europeans’ propensity to invest their savings.
It revises existing rules set out in the Markets in Financial Instruments Directive (MiFID II), the Insurance Distribution Directive (IDD), the Undertaking for Collective Investment in Transferable Securities (UCITS) Directive, the Alternative Investment Fund Managers Directive (AIFMD), and the taking-up and pursuit of the business of Insurance and Reinsurance Directive (Solvency II), as well as an amending Regulation, which revises the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation.
It’s hoped these changes will encourage retail investors’ to take full advantage of the EU’s Capital Markets Union, an essential means to channel private funding into the EU economy and to fund its green and digital transitions.
In May, Mairead McGuinness, commissioner for financial services, financial stability and capital markets union, said: “Europeans are good savers but less likely to invest and this retail strategy aims to unlock the investment potential of savings.”
The Commission spent three years gathering evidence for its proposals, studying key retail investor issues, holding public consultations, and liaising with European supervisory authorities and stakeholders.
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