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Richard Saunders: Europe's consumers need a more open market

Richard Saunders: Europe's consumers need a more open market

In fund management terms, Europe is getting smaller.

After a quarter century of Ucits directives, the market has transformed. Ucits has lowered barriers between states, allowing investment managers to build a business presence in continental Europe, as both Oeics and their Luxembourg and Dublin equivalents are sold in continental markets to continental consumers. The barrier to entry of offshore fund tax rules no longer exists: offshore funds are now admitted into IMA sectors and sold across the EU and beyond. Consumers have access to a global range of products.

But Ucits has gone only so far. Industry practice prevents UK investment managers from breaking into Europe. The key problem is the culture of banking distribution and lack of independent distribution. In contrast to the UK’s IFA model, Europe’s bank and insurance distribution networks often have limited competition, and terms of trade are not communicated clearly to consumers. More needs to be done for European consumers. 

Why is this so important? Currently many savers are unaware of the investment options available to them and are encouraged to buy products they do not understand. Different rules about what providers must tell their customers about risk, costs and performance compound the problem.

New legislation brings hope

But there is now hope for improvement: new legislation from the European Commission, the proposed Packaged Retail Investment Products (Prips) initiative, whose initial proposals will be unveiled later this month, is a big step in the right direction. A key aim is to level the competitive playing field to ensure all investment products are subject to the same overarching set of disclosure rules across the EU.

Under Prips, it is proposed all competing financial products would have to disclose the same information, using the Key Investor Information document (KII) as a benchmark. This would clearly communicate the risk, performance and charges of a product.

The initiative also intends to address selling and marketing practices across Europe so consumers understand the status of the adviser providing advice and whether he or she is acting on the consumer’s behalf or as an agent of a company.

In developing Prips, the EC should look to import the best standards to be found in the financial services industry. Those standards largely exist in the Ucits funds world. The EC would do well to implement the key tenets of Ucits: transparency and comparability of products.

However, there is a danger that the admirable aspirations of Prips could get watered down and whole sectors of the financial services industry, such as banking, could be omitted. Continental banks and life insurers contend that they should be exempt from the proposed regulation. And unfortunately their European regulators (which are wholly concerned with institutional solvency) have little interest in issues concerning the protection of retail investors.

If Prips does come into effect, it would allow consumers to make better informed choices across competing products. But it will only be a first step. It won’t bring better education for consumers or give them the tools they need to make investment decisions. Many policymakers want consumers to become gradually more engaged with saving and to understand the risks and benefits of an investment, but this is a difficult ambition to achieve.   

The onus is on the financial services industry to improve the retail market experience for consumers and allow them access to competent professionals capable of giving impartial advice. In order to empower consumers and facilitate informed decision-making, product providers need to offer clear information, and transparency and regulation needs to create fair competition by requiring them to do so.

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