Stricter consumer protection regulations to encourage households to enter the stock market appear doomed to failure
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Brussels wants more Europeans to buy stocks – but its plans to do so could fail amid skepticism from lawmakers and governments.
Particularly controversial is an EU plan that could potentially end the billions of dollars in commissions that financial intermediaries can receive for promoting products – incentives that consumer advocates warn can lead to bias and mis-selling.
The European Commission is looking to stronger capital markets as a way to finance its economy, where companies now often rely heavily on bank loans. But it is finding it difficult to attract consumers to become retail investors, who would play a key role in building the industry alongside institutions such as insurance companies or pension funds by buying stocks, bonds or funds.
While household stock purchases are routine in America, risk-averse Europeans prefer to stick with staid savings accounts – although officials hope they will be persuaded by stricter consumer protection rules.
“We need to increase the participation of retail investors because that would be good for investors, good for business and good for the economy,” Marcel Haag, director of the Commission’s financial services department, told a conference of asset managers last week – but he added, that in order to attract repeat investors, “we must ensure they can trust the financial markets.”
Transatlantic Gulf
In a May policy paper, the Commission raised concerns about the transatlantic divide – with only 17% of EU households’ wealth held in securities, compared to 43% in the US – and laid out new rules of the game to build trust in investments.
Perhaps most controversially, the EU executive is calling for a partial ban on incentives – the cash rewards that intermediaries receive from manufacturers when they sell a financial product.
The Commission wants consumers to receive clear and fair advice when purchasing financial products, without sales staff being influenced by their own salaries.
But these incentive payments are also lucrative and amounted to 5.2 billion euros in the insurance sector alone in 2015, according to a study by EU regulators.
Although the Commission’s proposed ban on incentives would, at least initially, only apply if intermediaries do not provide financial advice, it has already faced immediate opposition from the European Parliament, where liberal lawmaker Stéphanie Yon-Courtin has been tasked with rewriting the incentive rule book.
Yon-Courtin, of Emmanuel Macron’s Renaissance group, told a conference convened by the European Fund and Asset Management Association (EFAMA) that she had “stripped” the proposed rules from her draft law, saying: “I don’t think they are either a ban.” Whether partial or complete, is the solution to all our problems.
Bias
A set of benchmarks set in the commission’s plan – which could result in underperforming funds being forced to withdraw from sales – could imply government-imposed price controls, and the standards are “focused on low-cost products,” Yon-Courtin said.
Their views, first set out in a document dated October 9, are only a first draft – but there are indications that the Commission’s plans will also face headwinds in the Council, the body that brings together EU governments come together, which must also agree to the new law.
“As far as incentives go… the reception from member states has been quite mixed,” Fernando Álvarez-Cienfuegos, financial services adviser to the Spanish government, which is currently leading the council talks, said at the same conference. “We have to work to find alternative solutions.”
In both the Netherlands and the UK, where incentives are banned, official studies have shown that the quality of financial advice has improved.
A January study by the European Securities and Markets Authority suggests that buying the right product can make all the difference – as the high fees that financiers charge for actively managing investment funds tend to outweigh the added benefit for consumers to funds that simply track the markets.
And consumer lobby groups like Brussels-based BEUC also want to ban incentives, arguing that they reduce supposedly impartial financial advice to little more than a sales pitch that frustrates and disinterests customers.
alternative
However, according to researcher Maximilian Bierbaum, Britain’s restrictions may not have made markets more fair, transparent or accessible. Encouraging retail investment won’t happen overnight – and financial regulations aren’t the be-all and end-all, he believes.
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“The best rules have no effect if people are not aware of them,” Bierbaum said of investment incentives, implying that measures to shift cultural taboos are needed rather than more EU-led consumer protection rules.
In some countries like Germany, stock markets are perceived as risky speculation. Many Europeans may be wary of emulating the United States, where the lack of a welfare state could force families to turn to private markets to provide a safety net.
Fortunately, the EU has a flagship closer to home – in Sweden, says Bierbaum, head of research at the London think tank New Financial.
Half a century ago, the Nordic country introduced a series of measures to help citizens, as Bierbaum puts it, “have a stake” in the economy.
Today, Swedes – with a simplified tax structure for their investments, easy access to digital technology and a non-profit program to educate young investors – own more than twice the EU average in stocks, bonds and funds.
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Conflicts
Yon-Courtin and Bierbaum’s skepticism towards strict regulation seems to be shared by the industry.
Many industry players argue that conflicts of interest can be resolved through market transparency, not additional paperwork, and that while the Commission’s plan will protect existing investors, it will not convince new investors.
Without incentives, clients are required to pay upfront for financial advice, something many are reluctant to do, industry players claim.
When it comes to boosting retail investment, “we don’t have a panacea – otherwise we would have done it already,” Sandro Pierri, chief executive of BNP Paribas Asset Management and EFAMA president, told reporters last week.
“Tax incentives are clearly the first thing that comes to mind” when it comes to encouraging individual investors, he said — referring to tax incentives that have long been a staple of retirement planning in the U.S.
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Others argue that education is important – and that when it comes to investing, quality is as important as quantity.
“Another trend among young private investors: they are investing heavily in cryptoassets,” Delphine de Chaisemartin, deputy general director of French asset management lobby group AFG, said at the conference.
“Are these really the retail investors we need?” asked de Chaisemartin. “Will they finance the European economy? I’m not sure.”
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