Views on improving the integrity of global capital markets
12 April 2016

European Commission Shifts Capital Markets Union Focus to Retail Investors

Posted In: Market Structure

More than one year since the European Commission first consulted on the planned European Capital Markets Union (CMU) initiative, the focus is now shifting to the details of the framework. As part of the ongoing CMU policy work, the Commission published a Green Paper on Retail Financial Services (a public consultation) in December 2015. CFA Institute supports the Commission’s vision of a more unified retail investment market in Europe, and in our response we commented on a number of challenges mentioned in the Green Paper.

The Green Paper demonstrates that the Commission is leaving no stone unturned in trying to understand the best ways to improve cross-border purchasing of financial products in the EU. While previously the Commission has focused on broader structural issues facing European capital markets, the effort has now turned to specific regulatory gaps, impediments, and participants in financial services — this time on retail consumers.

CFA Institute policy analyst Maiju Hamunen breaks down our response to the EC’s Retail Financial Services Green Paper.

The subheading of the Green Paper — “better products, more choice, and greater opportunities for consumers and businesses” — is telling. The Green Paper consists of more than 30 questions covering a myriad of topics within the retail financial services sphere: from fintech, investment advice, and consumer redress, to insurance, banking, payments, and foreign currency services. Even the car rental industry is examined. The aim of the Green Paper is to discover policy measures that could enable retail investors to invest more seamlessly into the pan-European capital markets.

CFA Institute responded to the Commission’s Green Paper on 18 March 2016. Our response highlighted that we are supportive of consistent and clear information and disclosure requirements for all retail investment products, as well as encouraging high-quality and widely accessible distribution channels within an effective investor protection framework. Our responses focused on:

  1. The need to improve the Undertakings for the Collective Investment in Transferable Securities (UCITS) Directive framework
  2. Innovation in digitalisation and fintech
  3. Means to improve investor redress in retail investment markets

Our responses on the four key areas are further elucidated below.

Cross-Border Investments Remain a Concern

In our response to the Green Paper, CFA Institute highlighted that further steps could be taken to ensure an even application of the UCITS Directive and the Alternative Investment Fund Managers Directive (AIFMD) rules in the EU.

Ensuring that the investment opportunity is well understood, easily accessible, and tradable, and offers an attractive risk/reward proposition would increase cross-border retail participation in UCITS. There are duplicative and additional rules, for example, on the requirement to appoint a local depository, and on authorisation of ancillary services between home and host supervisors when passporting services to another EU Member State. In addition, the requirement for UCITS to appoint a paying agent in each jurisdiction where a fund is marketed can act as an additional cost and burden that is not always justified by the added value for local investors.

We also noted that administrative fees, such as registration costs, levied by some host authorities for cross-border fund notifications could be further simplified and harmonised. Other national differences on investment funds in general concern, for example, taxation and translation requirements for marketing materials.

The uneven application of the UCITS and AIFMD rules can act as a barrier to cross-border investments. In addition, we are concerned that the regulatory fragmentation can result in proportionally higher costs to run funds and prevent the EU fund industry from realising economies of scale. We also support improving the visibility and transparency of underlying risks in the context of fund reporting and disclosure rules. The expected revision of the UCITS rules in 2017 could be an opportunity to address these issues via harmonising measures, and lead to more confidence and certainty when investing outside of the home Member State.

Digitalisation and Fintech to Overcome Barriers to Retail Markets?

Our response to the Green Paper highlighted that several challenges related to cross-border financial services can be overcome with the developments in digitalisation and in the fintech sector. In particular, we believe the financial services industry will increasingly use so-called “robo-advisers”. (See related analysis of robo-advising trends globally.)

Innovative financial digital services and an effective use of technology, such as automated financial advice, can help overcome barriers in the retail financial services market. Digitalisation could reduce the cost of investment advice, open up access to products, and remove physical or geographic barriers associated with human advice. We are broadly supportive of these developments. However, at this point we do not foresee any means by which the EU should support innovative fintech companies via legislative or regulatory developments. We believe that the industry should be left to develop on its own without undue regulatory burden at this stage.

The potential for a “digital passport” could also facilitate the cross-border distribution of financial products across Europe. For simplicity, a digital passport could be an online identity verification mechanism or tool that would be recognised by all financial services entities, including banks. The passport would contain in one single platform all the details of a person’s savings or investments, for example. There have already been discussions about the possible development of a nationwide digital passport in the United Kingdom. A digital investment passport could be useful in particular for retail investors, by making investment products accessible and simplifying the investment process. CFA Institute believes that if a digital passport is created, adequate measures should also be taken to safeguard the personal data in the passport.

Strengthening Investor Redress Mechanisms

Another key focus area in the Commission’s Green Paper was on investor redress, in particular considering the national implementation of the Alternative Dispute Resolution (ADR) Directive. The Commission also asked several questions on the functioning of FIN-NET, a financial dispute resolution network of national out-of-court complaint schemes in the European Economic Area countries that handles disputes between consumers and financial services providers.

Our response noted that the role of FIN-NET could be strengthened with a formal mandate to increase the information available for both participating and nonparticipating ADR schemes in a manner that allows for meaningful comparison across schemes and jurisdictions. For this purpose, FIN-NET could deliver minimum standards regarding reporting and disclosure for ADR schemes and periodically compile and compare available information. FIN-NET could also be further strengthened by increasing the number of languages in which the service is available, and staffing a permanent secretariat with the capacity to monitor the functioning of ADR schemes across the EU.

These and other aspects of investor redress mechanisms are further examined in a study that CFA Institute published in August 2014. The report explores investor redress based on a survey of best practices and regulatory frameworks in Europe, Asia, and the Americas.

Upcoming Public Consultation: Cross-border Distribution of Funds

The Commission received 428 responses to the Green Paper, the majority of which have been published online. The Commission’s team is currently going through all the responses and will consider policy actions based on the comments received. For example, we expect the Commission to launch a public consultation on the cross-border distribution of funds in the coming months. In addition, the Commission has recently started further work examining retail distribution challenges, with the goal of reviewing the retail distribution framework in 2018. An official study may precede that in 2017. CFA Institute will continue to actively follow the developments on behalf of our members.

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Image Credit: FrankyDeMeyer

About the Author(s)
Maiju Hamunen

Maiju Hamunen was an analyst for the Europe, Middle East, and Africa (EMEA) region in the Capital Markets Policy Group at CFA Institute. She was responsible for developing research projects, policy papers, articles, and regulatory consultations that advanced the policy positions of CFA Institute.

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