Author: | Published: 27 Mar 2017
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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 Association

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 necessary.

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 retail investors?


Guillaume Eliet, managing director, regulatory policy and international affairs, Autorité des Marchés Financiers

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 investor protection.

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 protection.

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 to consumers.

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 retirement.




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