Markets Insight
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March 20, 2012 11:17 am
Efforts on investor safeguards fall short
Investor protection has been the rallying call of regulators and policy makers since the financial crisis took hold. Failure to strengthen it will contribute to European economic growth remaining elusive. Yet so far the European Commission’s initiatives have somewhat missed the mark.
In taking an approach based mainly on prudential regulation, and without fixing the day-to-day practical inefficiencies of the saving products market, the Commission risks addressing only part of the issue and – worse – confusing the investors it is trying to reinvigorate.
The Commission is drafting regulations around investor protection. Some, such as Mifid II, are advanced; others are, however, still in an early phase, such as legislation relating to packaged retail investment products (Prips) and the Insurance Mediation Directive (IMD). We are told these different initiatives should take a harmonised view of relationships between providers, distributors, advisers and investors to give investors the right balance of protection.
The reality is that this overall initiative has adopted a piecemeal approach and has been protracted. As a result, for the foreseeable future protection and transparency rules will vary depending on the product and the distribution channel an investor chooses. This patchwork structure will encourage regulatory arbitrage: the most transparent channels and products will be the most disadvantaged. This is hardly in line with fair competition ideals.
So what’s the alternative? The Mifid II proposals seek to address investor protection issues for some financial instruments by supplementing the regulatory framework of Mifid I. But Mifid I includes provisions which could improve investor protection. These are not uniformly enforced across the European Union and apply only to Mifid regulated products. Before establishing more regulations, it makes sense to implement Mifid’s provisions effectively.
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Additionally, more must be done to improve the relationship between investors and their advisers and providers. The Commission has focused on disclosure and inducements in Mifid II, yet it should take a broader approach embracing the definition of advice, salesforce training and qualification and the product launch process. These ideas need to extend into Prips to identify all the products that should be regulated, and their distribution mechanisms to ensure a level playing field.
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Ultimately, investors should be able to choose the product, advice model and cost structure that suits them best. To do this they need to understand the options available, the risk/reward profile and potential outcomes. Some retail investors may consider derivatives a dirty word, for example, but used correctly they can deliver good results. But they must be explained and sold in a transparent and competitive way.
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This new regulatory framework should also focus on governance standards for all Prips providers to ensure best practice in product design, supervision, and marketing and distribution across the single market. All financial advisers, distributors and intermediaries should also be qualified to sell Prips via a Europe-wide certification regime. Together with common disclosure standards (which must cover the total cost of investment), this is fundamental to encouraging investors back into the market. In the long term, financial education is essential because no rules can adequately address retail investors’ lack of knowledge.
We need investors to fund growth projects that bring benefits to the real economy and to secure their own long-term financial future. Yet, the regulatory framework being devised today will neither tempt investors back, nor adequately protect those that do return. Indeed, it risks adding cost through an overly complex set of mismatched rules that are limited to a few narrow initiatives.
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The European Parliament must start a dialogue with all relevant stakeholders to put forward proposals to align the regulation of financial instruments and insurance products.
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It would be refreshing to see the views of pan-European policy makers, regulators, Prips providers, distributors and investor associations coalesce into a single investor protection blueprint. The resulting regulatory initiatives would go well beyond provisions contained in the current draft of Mifid II and respond to the long-term need for a level playing field of investor protection that any fully functioning saving market requires.
Such a move would also demonstrate to European citizens that it is the ambition of Brussels to draw lessons from the financial crisis that go beyond addressing systemic risk issues, and that deliver concrete tangible improvements to their daily lives.
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Jean-Baptiste de Franssu is a former chairman of EFAMA, the pan-European asset management association and chairman of INCIPIT, an advisory and advocacy firm
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Copyright The Financial Times Limited 2012.
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