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Roundtable FISMA Retail Investment Products 18 July

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On Tuesday 18 July 2023, Gerben Everts and Armand Kersten attended the roundtable organised by
Mairead McGuinness, European Commissioner for financial services, financial stability and Capital
Markets Union (‘FISMA’), on the distribution of retail investment products. The roundtable had the
tagline: A fairer consumer experience and increased retail investor participation in capital markets.

On the Roundtable, see: Roundtable on the distribution of retail investment products (europa.eu)

In May 2023, the European Commission adopted its proposal on the Retail Investment Strategy. The
proposal covers a range of enhanced protections for the retail investor including new and improved
rules for disclosure and marketing, to ensure that retail products provide value for money and to
address conflicts of interest. Inducements paid by product manufacturers to intermediaries are still a
common practice in many parts of Europe. However, research shows that inducements often
encourage intermediaries to sell products to their retail clients that may not always be in their best
interest. This ultimately impacts the level of participation of retail investors in capital markets.

In organising the roundtable, Commissioner McGuinness called on ‘key industry associations’ to
reflect on concerns around current market practices, including inducements and the availability of
unbiased advice, to re-evaluate current practices and consider developing possible best practices
that would address or mitigate the potential conflicts of interest and their detrimental effects on
retail investors.

The roundtable of Tuesday 18 July, brought representatives of key industry and consumer
stakeholders to the table. The professed aim was to launch an industry-led deliberative process, to
discuss issues related to current market practices and jointly explore a tangible industry-wide
response to help address existing problems.

Hence, the roundtable was not intended directly to address any components or elements associated
with the Commission Proposal on the Retail Investment Strategy. This had the straightforward reason
that the proposal is currently going through negotiation with the European Council and the European

The invitation extended to Gerben Everts in June acknowledges ‘the important role European
Investors – VEB plays in this area’, thereby proffering the opportunity to share our views, participate
in the discussions and help shape the industry-wide response aimed at ensuring that retail investors’
best interests are better served and that the level of market participation of retail investment

The idea was to kickstart an entirely industry-led process. The European Banking Federation (EBF),
represented at the roundtable by its CEO Wim Mijs, now provides the secretariat and coordinates
the logistics of the follow up work. It is envisaged that in six months, a follow-up roundtable will take
stock of the results.

Thus, we found ourselves amidst a majority representation from industry associations, one trade
union representative (the international trade union for financial advisers), a small number of
consumer associations and a representation from academy (professor Steffen Sebastian from the
University of Regensburg).

The roundtable was webcast (contribution European Investors from 10:20:10 onwards), see:
Roundtable on the distribution of retail investment products on 18 July 2023 – AM – Streaming
Service of the European Commission (europa.eu)

The meeting opened with a brief speech by FISMA Director General John Berrigan. The key take-away
from his speech was that the ‘industry’ may sometimes grunt that regulation can be disruptive, but
that all players involved ought to acknowledge that the challenges posed by the prevailing
circumstances (climate, geo-political and socio-demographic) often necessitate the EU to resort to
legislative action failing appropriate action by society itself. Thus, he argued, it is up to the parties
gathered at the table to see where they could act to anticipate and, thereby, take an impactful
engagement in shaping possible future legislation.

All parties represented, were given the floor to pitch their key points. By a stroke of coincidence,
Gerben Everts’ pitch was the only one witnessed by Commissioner McGuinness in person, since she
just came into the meeting before he took the floor.

Contribution on behalf of European Investors:

  • Many thanks for the invitation to be present today. We are strongly of the opinion future
    regulation benefits from listening to stakeholders from all angles prior to drafting new
    initiatives. Hence, this initiative is much appreciated. Good timing. And an important
  • A bit about ourselves as we might appear to be rather new on the regulatory scene. Next
    year, European Investors, formerly known as the Dutch Shareholders Association, will
    celebrate its 100-year anniversary.
  • We do have a long history in promoting investors’ interests, defending investors’ trust in the
    proper functioning of financial markets and services. Adapting and improving corporate
    governance. And active engagement with listed companies.
  • On behalf of our 30 thousand retail members who depend on adequate consumer and retail
    investor protection.
  • And we will continue to do so. More on EU-level in going forward as a real EU-market is
    developing step by step.
  • On content: investor protection is never a safe harbour. There is always the threat coming
    from issuers and intermediaries not to respect investor’ interests. Hence, client centricity
    (acting in the best interest of your customer) is of the essence in developing new rules. This
    requires a strong focus on behaviour – beyond disclosure requirements. Intermediaries and
    advisors must be legally forced to put their clients’ interest first under all circumstances. This
    will do away with suboptimal incentive schemes and inducements. These are – dare I say –
    hardly ever in the real interest of investors.
  • Another signifant threat I see, is the continuous plea for softening regulatory requirements in
    European legislation. We warn for too much optimism and enthusiasm. You can’t force the
    horse to drink the water if it does not trust the quality of intermediation and advice. The local
    regulator and supervisor in the Netherlands, where we come from, focused on the true
    quality of investment advice after huge misuse of incentive and inducement structures.
    Consequently, the retail clients are better aware and more critical. I consider this to be part of
    investor education and financial literacy.
  • In the Netherlands, the retail participation in the capital markets is highest in Europa. Retail
    investors prove to be very well able to make their own decisions, analyses and apply digital
    tools. Execution only – in addition to paid advice where appropriate – is serving investors very
    well. Many retail investors elsewhere in Europe are not aware of the incentive structures
    which are not in their interest and eat away large parts of their future revenues. The most
    important advice retail investors need is the advice to save on unnecessary costs they have to
    pay every year for a one-off advice from a long-long-time ago.
  • A further threat is the competition between Member States to make optimal use of flexibility
    in the transposition of EU Directives. Member States argue that the more flexibility is allowed
    for companies, the better the economy and financial system would function. We do not
    agree. You see a lot of competion on regulation, instead of in actually doing business, with
    high quality products and services, at reasonable costs. Those jurisdictions with less consumer
    and investor protection, de jure or de facto, will attract companies and intermediaries which
    put the client interest less at center stage. This silently eats away the investment climate in
    Europe and the equity culture we need to strengthen. John, you said we want to see more
    retail participation. That is indeed the real challenge for the decades to come. Strengthening
    the equity culture cannot go without adequate investor protection.
  • We very much appreciate the leading role the European Commission has taken on retail
    investor issues. On withholding taxes, insolvency laws and in setting the first important
    strides into a ban on inducements. However, we would like to draw your attention to another
    structural weakness, i.e. the lack of rules concerning collective redress mechanisms. Open for
    investors and advisers. We all want to see more pan-EU investments. However, investing
    across borders is considered to be far more risky than investing within a Member State.
    Access to redress outside the Member State of a retail investor is absent in practice or
    extremely complex and costly. Retail investors shy away from this risk.
  • Irrespective of where a company is registered within the EU, it must be liable for infringement
    of applicable corporate reporting or disclosure obligations vis-a-vis all its investors. We deem
    it necessary that clear legal remedies are available to allow compensation for investors across
    the EU in a simple form of pan-EU collective redress.
  • To conclude: these are some of the building blocks of an equity culture we see fit. I sincerely
    hope these can be picked up in the future strategy of the Commission. Working together with
    all important players around the table, including the retail voice. Obviously, we are happy to
    continue to collaborate with the Commission and all of you on these important topics.
    There followed a speech by Commissioner McGuinness. In many regards, her speech reflects issues
    clearly outlined in the Proposal on the Retail Investments Strategy. Whereas the Retail Investment
    Strategy is a key pillar under the Capital Markets Union, it is however a component thereof. The
    Capital Markets Union seeks to enable innovation. Innovation is dependent on funding through
    capital markets. If the capital markets don’t work, we may not achieve the essential policy objectives,
    among which the energy transition figures prominently.
    Professor Steffen Sebastian presented on his academic work on the effect of inducements. With an
    explanation of his empirical method, he concluded with three clear take-aways: a ban on
    inducements has
    ➢ a positive effect on household returns on investments;
    ➢ no effect on savings; and
    ➢ is positive for poorer households.

    The audience then dispersed for three parallel break-out sessions as follows:
  1. Using new technologies to better assist consumers
  2. The future of financial advice – how to ensure financial advice works better for consumers?
  3. Aiming at an increased retail investor participation in capital markets – fostering growth and
    competitiveness in the retail segment

    Armand Kersten attended the second – the future of financial advice, moderated by Apostolos
    Thomadakis from CEPS-ECMI. This session came up with a recognition that technology will drive seachanges, but there was a sentiment that the human-element should always remain involved. It
    stressed that the success depends to a great extent on the professional qualities of financial advisers,
    requiring emphasis on training and standards, such standards only being credible if supported by
    adequate and prompt enforcement where there are breaches. Professional advice follows the laws
    of the market for lemons. This means that it will never be entirely possible to drive out poor quality
    advice, whereas there is also a recognition that the market for advice will never be fully transparent.
    The break-out on technological advancement signalled opportunities outweighing (evident) risks.
    Technology may help to analyse customer preferences (thus supporting suitability and
    appropriateness). It may support layering information, the information thereby becoming more
    accessible. It supports reducing cost.

    Gerben Everts attended the third – increasing retail investor participation in capital markets, which
    session was moderated by Karel Lannoo from CEPS-ECMI. This session stressed the need for fair and
    efficient markets, where diversification and returns are important. Investors want (qualitative) value
    for money, preferably with simple products. Pan-EU pension products should be allowed a second
    chance. Financial literacy and financial education are important, but one should caution for biases
    (education by intermediaries). Labeling risks in an easily digestible format seems to be helpful, but
    one should not overdo this as it might be confusing. The same skepticism applies to the use of
    benchmarks. Along with our pleas, the break-out concluded that:

    1. The important concept of client centricity should be incorporated in the law and the role of
    supervisors enhanced;
    2. The introduction of pan-EU collective redress is considered to be crucial in order to attract
    cross-border retail investments;
    3. The essential rights of share- and bondholders should be kept intact.

    The next steps are that the EBF will draft a report by this year-end, striving to distill such key points
    as will promote progress in addressing the shortfall in retail investor participation in capital markets.
    Wim Mijs professed that it may be overly ambitious to expect there to be a formulation for best
    practices at this first stage (ie year-end).

    John Berrigan reminded all participants on the relevance of this workstream: ‘What’s coming to you
    in the future is a lot more impactful than we now have on the table. Be prepared and cope with it!’

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