Q: Is the current level of regulation aimed at protecting
EU retail investors appropriate and effective?
Zak de Mariveles, chairman of the UK Structured Products
You don't have to look back too far to remind yourself
of the many scandals that hit global headlines in recent times
– Fifa corruption, Toshiba accounting or Volkswagen
CO2 emissions to name just a few.
And the world of finance is no different.
It's not hard to rattle off a seemingly endless list of
scandals that have rocked the world of finance and consumer
confidence from Bernie Madoff and Enron to sub-prime mortgages,
the mis-selling of payment protection insurance, Split capital
investment trusts and endowment mortgages.
It's hardly surprising then that regulators are focused on
the need to protect retail investors, and over recent years a
huge amount of activity in this area has taken place. This
doesn't just affect investors in the UK, with the recent
Packaged Retail and Insurance-based Investment Products
regulation (Priips) and the Markets in Financial Instruments
Directive (Mifid II) regulation focusing on protecting
investors across Europe.
But, when we focus specifically on retail investments, is
the current high level of regulation currently applied across
European member states appropriate?
In the age of the internet where information is freely
available, investors have access to resources to do their own
research and not solely rely on intermediary experts, financial
advisors and asset managers. And is the ever-increasing burden
of regulations not at risk of simply increasing costs to end
investors and stifling innovation?
What is obvious is that we need a level regulatory playing
field across all investments, as often some asset classes have
borne the unnecessary brunt of regulatory focus while others
have remained largely untouched. This leaves retail investors,
thanks to ill-informed commentators, with a skewed perspective
of the investment landscape, and open to the risk of making
poor investment decisions higher than is arguably
The advent of the Priips regulation and of Mifid II, with
their broad reach and focus not just on transparency of costs,
performance and risk/return profiles, but also on the
underpinning product governance processes of manufacturers,
will, I am sure, help retail investors and advisors alike.
It will help them dispel the myths and make better informed
decisions about how various products compare and their
appropriateness for their needs.
But we must avoid a nanny state where investors, despite
this wealth of information available, are deemed by the
regulators to be incapable of making their own investment
decisions, or without responsibility when the outcome is not to
their liking or doesn't turn out in their favour.
Such a blame(less) culture will only drive the investment
landscape to the very simplest of low risk, cash-like
investments, where all innovation is curtailed for fear of
litigation. It will bring with it the risk of us losing sight
of the very essence of investing, and the concept of
diversification and risk and reward.
It's a delicate balancing act, and regulators would be wise
after Priips/Mifid II to take time to reflect on whether that
balance is right or not.
I believe it is, but only just.
|How much protection is too much for EU
Guillaume Eliet, managing director, regulatory policy and
international affairs, Autorité des Marchés
Since the 2008 financial crisis, the European financial
regulatory framework has been strengthened with the aim of
ensuring a high level of investor protection and market
integrity. Mifid II will improve pre- and post-trade
transparency for an efficient price formation process for the
benefit of all market participants. It will help avoid
conflicts of interest and impose product governance obligations
to justify products that correspond to clients' needs.
In order to enable retail investors to make their choice of
investment, European legislation has focused on transparency as
well and on the availability of information in the key
information document. Priips provides a good illustration.
Information is essential to allow investors to make their
decision but is not sufficient alone to protect them. European
regulation should continue to put forward advice and promote
supervision, which provide the tools for a better level of
Advice and supervision are both challenged by the advent of
digitalisation. The entire investment product universe
(insurance, structured products and funds) is calling its
distribution models into question. The expansion of the
internet has reduced distribution costs considerably. Moreover,
new technologies potentially facilitate improved interactivity
between professionals and savers. They enable the former to
require the systematic completion of online questionnaires
prior to the provision of any advisory service. Thus,
digitalisation facilitates the traceability and storage of
information gathered via online questionnaires. It is also a
means to remove barriers.
Facility of access does not, however, imply simplicity
regarding the products that are being offered. The risks of a
poor match between the product and the investor's need are
increased automatically. The analysis of the product and its
fundamental characteristics (performance, risk and liquidity)
remain an essential part of the purchase. This is why
digitalisation should encourage regulators and legislators to
define or re-define advice, commercialisation and reverse
solicitation to offer retail investors an optimal level of
Levels of financial literacy vary among member states.
Individual savers' behaviour and the perception of advertising
or information documents also differ from one country to
another. We should bear in mind as well recent cases of
mis-selling of forex or binary options and the resulting harm
Since it is not possible in practice for supervisory
authorities to monitor marketing campaigns that are run in
other countries, the responsibility for the supervision of
marketing documents should remain with the host authorities and
the home/host regime for more overall freedom to provide
services should be reviewed. Retail investors should be offered
the same level of protection, regardless of where the products
originate from within the European Union. Investor protection
feeds investor confidence and this confidence will allow
markets to play their part in financing companies and