These days, the attention of the financial industry, the regulators, the media, and the public at large in Europe is focused on the Greek sovereign debt crisis and the riots in Athens. This is understandable, as a blunt Greek default would further impair an already fragile European banking system. However, these exceptional circumstances should not make one forget another issue that has led to the distrust of investors in financial services, and remain to be addressed: the mis-selling of financial products by self-interested financial advisers, which led many retail investors to buy financial products that were unsuitable to their risk profile but which allowed intermediaries to collect sizable fees.
In fact, in the Financial Market Integrity Outlook Survey conducted by CFA Institute among 98,079 of its members in January 2011, “mis-selling of products by financial advisers” was flagged by respondents as the most serious ethical issue facing their local markets.
The European Commission has been looking at the issue since 2007, and following a second consultation on the subject, which CFA Institute answered on 31 January 2011, is foreseen to publish in July a proposal for a directive defining a general framework for “Packaged Retail Investment Products” — so called “PRIPs”.
One element of the proposal that is likely to lead to controversial discussions in the European Parliament and the Council of the European Union — the two decision-making bodies in the European Union — is the scope of the directive proposed by the European Commission. In fact, indications are that it will cover a significantly narrower number of financial products than initially envisaged (i.e. would be excluded: plain shares and bonds, deposits, pure life protection products, pension products).
One of the objectives of the PRIPs Directive, which CFA Institute views as essential, is to enhance the transparency of retail markets by helping retail investors to effectively compare the key characteristics of investment products, in order to make an informed decision. This would be achieved by introducing a Key Investor Information Document (KIID), which should be as standardized as possible to allow retail investors to compare the return, risk, underlying asset/strategy, and costs of the various PRIPs. For this, CFA Institute believes that the European Commission and the newly established European Securities and Markets Authority (ESMA) should draw the lessons from the recent UCITS (Undertakings for Collective Investment in Transferable Securities) Directive, under which a standardized Key Investor Document (KID) has recently and so far rather successfully been defined. However, the exercise will probably be more difficult for PRIPs, because of the diversity of financial instruments being covered. In particular, more work will have to be done on the assessment of the counterparty risk, the presentation of the fundamentals/underlying risk for structured products, as well as their costs.
In conclusion, one can expect more heated discussions on another widely debated European directive over the summer, and efforts of regulators, the financial industry, and investors should remain unabated, whether on one of the many directives on the table, or on the Greek crisis. Europe seems set for a hot summer!