12 October 2016 – In the framework of the CMU initiative, the EU executive aims to increase the cross border distribution of investment funds. At the moment, despite the success of the UCITS framework, a limited number of retail funds in Europe is actually sold in more than two Member States. This means EU-wide competition is limited. This harms end-investors.
Over the last four months, a consultation was held to identify some of the main barriers to the cross-border sale of funds in Europe and how they might be tackled. European Investors strongly supports this initiative and has submitted a response to the consultation, which closed on 9 October 2016.
Pre-contractual information
Retail investors need trustworthy information on available funds in Europe. In recent years, the EC has been working hard on creating concise and standardized pre-contractual documents (the KIID and KID) that provide objective information to investors, allowing them to compare fund easily.
In particular, retail investors should be able to make an informed assessment of the fund manager’s investment policy, the associated risk and costs, and the net performance – compared to an objective benchmark – that the fund manager has been able to obtain with his policy and will obtain in the future under different scenarios.
Many active fund managers are actually underperforming the market. Others charge high management fees but stay so close to the benchmark they aim to beat that one cannot not really speak of active management (so-called index huggers). Still others sell their funds as having low risk but in the meantime take excessive risk in order to obtain excess return.
Marketing materials
It should be noted however that many investors do not make their decisions based on regulated information pieces such as the KIID or let alone the prospectus. Instead, they look mainly into marketing materials. Such marketing materials do not always give a balanced view of the ups and downs of the investment that is marketed.
At the moment, marketing communications are supervised at national level, often on the basis of general principles and merely ex-post and selectively. A more harmonized and proactive European approach is needed.
In some Member States, like Belgium, marketing communications are approved ex-ante on the basis of detail rules. European Investors believes EC and ESMA should develop such rules for Europe as whole, with national authorities approving marketing materials ex-ante.
Distribution channels
Fund distribution in Europe should open up further. At the moment, it is dominated by large banks who do not give independent advice and sell only a limited number of funds, mainly their own funds (so-called inhouse funds) and other domestic funds.
Online platforms becoming more and more popular. Such platforms have the potential to turn the fund market into a truly European market. However, costs should be transparent. Also, any links to fund providers should be made known to investors or, preferably, not exist at all. Where necessary, appropriateness requirements, as dictated by MiFID, should be complied with.
These online platforms are meant for execution-only investors. Execution-only requires a level of self-reliance that not all investors possess. For those other investors, independent advisers should be available who assess a sufficiently broad and diverse range of funds, including EU foreign funds, and do not receive commission from fund providers.
What’s next?
The Commission will analyze the responses that it received and initiate (non)-legislative measures if and where necessary.
It is good to realize that the consultation has significant overlap with other initiatives of the EC, in particular the Action Plan on retail financial services that will be published end of this year, as well as the EU retail investment product markets assessment. Also, it relates to legislation that is still to be implemented, such as MiFID II and the PRIIPs Regulation.