With very high saving rates, around 17% of the assets of private EU households were held in form of financial securities (shares, bonds, etc.). By comparison, this share is 43 % in the USA. With a package to protect and empower retail investors, the EU-Commission wants to contribute to increasing consumer interest in the EU capital markets. On 24 May, the long announced proposal was presented. At the centre of the public debate is a commission ban for financial advisors, or rather its hesitant implementation.
The EU Commission set itself the goal of making long-term investment more attractive and safer for EU citizens with the capital markets union 2020 action plan. Nevertheless, they prefer traditional bank deposits. This is due, among other, to a lack of trust, says EU Commissioner Valdis Dombrovskis. The dominance of commission-based distribution models is said to be one of the reasons. This refers to commission payments that investment advisors receive from the manufacturer of the financial product - after successful mediation to the consumer. This can result in an incentive system that jeopardises fair and transparent advice in the interest of retail investors. In fact, it was found that these financial products are on average 25 % more expensive than comparable products without inducements. In a speech in January 2023, Mairead McGuinness, the EU Commissioner responsible for Financial Services, Financial Stability and Capital Markets Union, stressed that all EU consumers have the right to receive adequate advice at reasonable prices. Measures aimed solely at increasing transparency would therefore not be sufficient. The EU Commission's proposal for a new strategy for retail investors followed on 24 May 2023.
New rules focus on disclosure, financial advice, marketing and financial literacy
Meaningful engagement in capital markets can be difficult for retail investors. Information on investment products is usually difficult to access, complicated and not harmonised. The Commission proposal therefore focuses, among other, on disclosure requirements for financial products. Basic information sheets - documents on costs, risks and returns attached to the product - should in future present the most important points in a simplified and prominent manner at the top of the page. In addition to adding sustainability-related aspects of the financial product, an adaptation to the digital age is also planned. This also includes stricter rules against misleading marketing, especially on new marketing channels such as social media or through influencers. Another point concerns the cost-benefit ratio of financial products, which is to be assessed in future on the basis of harmonised reference values.
Commission ban, but only for pure execution-only transactions
At the core of the Commission's proposal is a partial commission ban. This concerns execution-only transactions - i.e. sales of investment products without financial advice. The fact that there was no complete ban on commissions, as already exists in the United Kingdom or the Netherlands, for example, is currently dominating the public debate on the proposal. This is suspected to be due to strong lobbying by large financial advisors (including BlackRock und Schroders). In addition, there was political pressure from individual Member States; the finance ministers of Austria and Germany also spoke out against a complete ban on commissions. Opponents of the commission ban cite the great importance of inducements for the banking sector and the value of universal access to high-quality advice. According to BEUC Director General Monique Goyens, “Due to kickbacks paid to so-called advisors, financial advice is, in many cases, nothing more than a sales pitch for consumers.“ Not only in view of the far-reaching consequences that bad investment decisions can have for consumers, it is clear that fair advice and a transparent overview of costs for retail investors must be urgently ensured.
BEUC: European Commission proposes insufficient reform to fix broken retail investment market
Financial Times: Critics lament Brussels’ decision to rule out full ban on kickbacks
EU Commission: Capital Markets Union: Commission proposes new rules to protect and empower retail investors in the EU
EURACTIV: EU Commission hesitant in tackling bad financial advice
EURACTIV: Germany, Austria lobby EU not to ban inducement-based financial advice
A&W Blog: Kapitalmarktunion – die eierlegende Wollmilchsau? (German only)