| 3 Reports on Capital Markets Union: Will Retail Investors Finally Find their Rightful Place at the Centre of EU Financial Policy? | | |
| Following a first report by the High-Level Forum on the Future of the Capital Markets Union (HLF CMU) published in June, the European Commission and the European Parliament followed suit. On 24 September 2020 the European Commission’s (EC) Directorate-General for Financial Services, Financial Stability and Capital Markets Union (DG FISMA) published a third action plan to build a Capital Markets Union (CMU) – this time for “people and businesses” - which set out 16 policy and regulatory objectives in order to “finally complete the Capital Markets Union”. Although the Action Plan is de facto built on the framework of the HLF CMU Report, BETTER FINANCE was disappointed to see that the most important recommendations of the HLF CMU for retail investors were not taken on board by the EC. The Action Plan says more than what it actually sets out to do: “Consumers should have more choice”, be “appropriately protected”, get “fair investment outcomes” since “savings generate low or even negative real interest rates”, the CMU should “contribute to building trust”, acknowledging that there is “limited comparability of similar investment products” or that “the current structure and features of retail distribution systems are often insufficiently competitive and cost- effective”. Yet, the measures planned to implement the actions on making “the EU an even safer place for individuals to save and invest long-term” lack the ambition from both the HLF CMU Report and the European Parliament’s Economic and Monetary Affairs (ECON) own initiative report on the further development of the Capital Markets Union (CMU). The latter was voted on 8 October 2020 by the European Parliament (EP) and calls for specific measures to help finance businesses, promote long-term and cross-border investment, strengthen market architecture and support retail investors. With more than 15 resolutions proposed or supported by BETTER FINANCE to truly put EU citizens at the heart of the CMU, the report presents a more ambitious take on the CMU than what could be found in the CMU Action Plan from the European Commission (EC), and is more in line with the key recommendations of the High Level Forum on the CMU for consumers and individual investors. Among the main strengths of the report, BETTER FINANCE welcomes the proposals on "inducements" (kickbacks), on key information for Packaged Retail Investment and Insurance Products (PRIIPs), on financial education and on Employee Share Ownership. The report also stresses the need to streamline and strengthen consumer and investor protection, as well as rebalancing the debt-equity bias. Unfortunately, some very good amendments proposed by the ECON members did not pass the vote, among others the strengthened twin-peak EU supervision model, and the proposal to ensure that Collective Redress rules would encompass both direct and indirect individual investors. More information: Press Release: European Parliament Reports on Capital Markets Union and Digital Finance: Retail Investors Finally at the Centre of EU Financial Policy? Press Release: All Talk, Little Action: European Commission releases watered down Capital Markets Union (CMU) Action Plan | |
| 2020 Edition of the “Real Return of Long-Term and Pension Savings” Report Anticipates the Advent of Corona Pensions | | |
| On 25 September 2020 BETTER FINANCE released the eighth edition of its report on the Real Return of Long-Term and Pension Savings, marking a new milestone for the series, since it is the first edition to cover 20 years of historical track record for retirement provision vehicles. At the same time, the report was released against the background of a pandemic that is taking its toll on pensions as well. Although all returns improved in 2019 thanks to strong equity and bond market performances, too many pension schemes covered by the report still reveal either negative or very low long-term returns once charges and inflation are deducted. Furthermore, since the end of 2019, these assets have dropped in value, most likely cancelling out a big part of last year’s gains. Today’s severe recession also generates a slowdown in pension contributions. With as much as two decades worth of returns, charges and asset allocation data, BETTER FINANCE once again raises the alarm and stresses that a reform of pension and capital market policies is necessary in order to mitigate the effects of the health crisis on pension adequacy. Some key findings: Supplementary - mostly individual (pillar III) - schemes underperform on average occupational - collective (pillar II) - pension plans; The vast majority of pension products underperform a simple capital markets benchmark (50% equity – 50% bonds); Fees continue to weigh heavily on nominal returns as conflicts of interests in distribution continue unabated; and The asset allocation of pension funds has increasingly shifted to fixed income and packaged assets (collective investment undertakings) versus direct holdings in securities. With the Covid-19 recession now looming, the pensions situation in Europe is building up to the perfect storm. Europe has entered a new period of maximum financial repression, with Public Authorities having explicitly chosen to sacrifice the protection of long-term savers to the artificial reduction of the Member States’ debt costs, by granting unprecedented subsidies to governments and banks (in the form of negative interest rates and massive public debt purchases). The advent of “Corona Pensions” is another blow for European pension savers. Further reading: Download the Full 2020 Report on the BETTER FINANCE website, or peruse the simplified version of the Pensions Report (Booklet) Press Release: “The Advent of Corona Pensions - 2020 is the Turning Point for Pension Policies” | |
| Wirecard abuse review by ESMA reveals significant failures and conflicts of interests in national financial supervision and the need for effective collective redress for abused investors | | |
| The very welcome European Securities and Markets Authority’s (ESMA) “peer review” report on the Wirecard scandal reveals the many failures and conflicts of interests that can plague even the most resourced national financial supervisors. It is unfortunate though that ESMA did not investigate the handling by the national supervisor of the clear and detailed warnings issued by the financial media - in particular, the detailed investigation of the Wirecard issues published by the Financial Times at the beginning of 2019 - months or years before the accounting fraud and scandal finally exploded. At the time, the only apparent reaction from BAFIN, the German national supervisor, to the FT investigation, was to sue the FT for alleged market manipulation, and to ban short selling of Wirecard stock. This reaction is all the more troublesome today in light of ESMA’s revelation that several BAFIN employees were speculating on an increase of the Wirecard share price! Despite another priority recommendation from the same HLF CMU and despite the Wirecard scandal, EU Authorities decided to still discriminate against abused individual non-professional shareholders and exclude them from the scope of the draft EU Directive on collective redress. As it stands, the abused EU citizens who bought Wirecard shares will still not have access to a Pan-European collective redress mechanism, available for all other consumers and individual investors who just buy “packaged” investment products. This is not the best way to promote a “Capital Markets Union that works for people”. More information: Press Release: Wirecard abuse review by ESMA reveals significant failures and conflicts of interests in national financial supervision and the need for effective collective redress for abused investors | |
| Digital Finance: towards higher levels of investor protection? | | |
| Besides the vote on the European Parliament’s Report on the Capital Markets Union (see article above), the Parliament also voted on the recommendations on Digital Finance from the ECON Committee. Here also BETTER FINANCE is pleased to see that many of the proposals it put forward over the years have been included, and remains hopeful that the need for independent product databases and independent web comparing tools will also be recognised by EU Public authorities. A well-thought-out FinTech Regulation should lead to higher levels of consumer and investor protection whilst simultaneously upholding fundamental rights with regards to the protection of privacy and personal data. More information: BETTER FINANCE Position Paper on the Digital Finance Strategy | |
| Stakeholders and authorities show faith in European Personal Pension (PEPP), while the finance industry decries the lack of incentives to sell it | | |
| On 22 September, BETTER FINANCE and its German Member Organisation, the Bund der Versicherten (BdV) organised an international conference on the Pan-European Personal Pension products, or PEPP. The “European Pension Savers under Financial Repression: is PEPP a solution?” Conference, attended by more than 200 participants, saw stakeholders from Civil Society and the Financial Industry discuss the potential benefits and pitfalls of a Pan-European Personal Pension (PEPP) product, focussing on the Level 2 PEPP Regulation finalised by the European Insurance and Occupational Pensions Authority (EIOPA) in August this year. Gabriel Bernardino, Chair of the European Authority EIOPA, Dragoş Pîslaru, Member of the European Parliament and the rapporteur for PEPP, and many other experts representing different stakeholders discussed the opportunities and challenges presented by PEPP. Nearly all stakeholders were optimistic about the future success of a PEPP. Whereas some lobbyists from the financial industry wanted to see more incentives for intermediaries to sell the PEPP, most participants agreed that, in these times of financial repression, the PEPP could be the solution that will provide more value for money and a chance to ensure a decent retirement provision. BETTER FINANCE, whilst strongly in favour of a PEPP, continues to point to the PEPP’s highly problematic “Capital Guarantee” feature in the default option, since it will do nothing to protect the real value of the capital invested. As it stands the purchasing power of the “capital guarantee” upon retirement will amount to just a small fraction of lifetime savings. A short video by BETTER FINANCE clearly illustrates this highly misleading “guarantee”. Level 2 of the PEPP regulations, drafted by EIOPA, now needs to be officially adopted by the European Commission. More information: Press Release: Stakeholders and authorities show faith in European Personal Pension (PEPP) | |
| European Regulator flexing its muscles to tackle “Closet Indexing” | | |
| Nearly six years after BETTER FINANCE wrote to the European Securities and Markets Authority (ESMA) to ask for an investigation into the issue of falsely “active” funds, a practice also known as “closet indexing”, ESMA published a Working Paper on “Closet Indexing Indicators and Investor Outcomes”, confirming findings from research also carried out by BETTER FINANCE and pointing out that: Potential closet indexers obtain significantly lower returns (gross and net) than active managers, potentially making them the worst performers on the market; Although closet indexing costs less than active management, it is far more expensive than passive management (index tracking): “closet indexing funds face an unjustifiably high level of costs, far in excess of those for explicitly passive funds”. Most importantly, ESMA now qualifies the practice of Closet Indexing as misconduct by asset managers, and, over the years, developed a “toolkit” that will allow it to engage in enforcement actions to address closet indexing. In this working paper ESMA also clarified the actual detriment suffered by investors and added an additional metric to be able to eliminate "false positive" closet indexers in its quantitative assessment. BETTER FINANCE applauds these considerable efforts by ESMA and believes that these supervisory developments will be key in addressing the detriment suffered by investors at the hand of Closet Indexers. Just like the British and Norwegian authorities did, ESMA should now disclose, at least to the national supervisors, all funds that have been identified as potential closet indexers and mandate investigations into these, as there may be hundreds of thousands of EU retail investors affected by closet indexing on long-term horizons (10 years at least), which could amount to hundreds of EUR millions of losses for them. More information: Press Release: European Regulator is flexing its muscles to tackle “Closet Indexing” Press Release: BETTER FINANCE Replicates and Discloses ESMA Findings on Closet Indexing | |
| MiFID II “Quick Fixes” harmful to EU citizens as “Retail” Investors | | |
| On 3 September 2020, representatives of Member States met to discuss the Capital Markets Recovery Package. The package consists of amendments to the Markets in Financial Instruments Directive (MiFID II), the so called MiFID “quick fix”, amendments to the Prospectus Regulation, amendments to the Securitisation Regulation and the corresponding changes to the Capital Requirements Regulation (CRR). The main aim of the proposed amendments is to help capital markets and their participants to swiftly recover from the economic impact of the COVID-19 pandemic by facilitating investments and recapitalisation of European companies. BETTER FINANCE addressed a public letter to the Chair and Members of the Economic and Monetary Affairs (ECON) Committee of the European Parliament to raise some concerns with the European Commission’s (EC) proposal to amend the Markets in Financial Instruments Directive (MiFID II). In the letter, BETTER FINANCE points to some proposals or amendments that would, beyond doubt, harm “retail” investor protection in the EU and constitute a step back from what has been achieved during the past 10 years. More information DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2014/65/EU as regards information requirements, product governance and position limits to help the recovery from the COVID-19 pandemic EC Coronavirus response: How the Capital Markets Union can support Europe’s recovery Public Letter to European Parliament's ECON Committee: Harm Done to EU citizens as “Retail” Investors Through MiFID II “Quick Fixes” | |
| #ECBListens: BETTER FINANCE addressed the European Central Bank on the Impact of Monetary Policy on Global Challenges | | |
| The ECB has a key role to play in addressing many of the short-term issues arising from the economic fallout that will follow the Covid-19 health crisis. It is for this reason that BETTER FINANCE warmly welcomed the ECB's first initiative in years to reach out to EU Citizens as users of financial services and strongly appreciates the opportunity to engage directly with the ECB on some of these crucial issues. For its #ECBListens live event on 20 October, the ECB invited civil society organisations to put questions to ECB President Christine Lagarde on how the bank can support social justice and climate goals and how the ECB could play a role in building a better European society for all. During his interventions, Guillaume Prache, Managing Director of BETTER FINANCE, put several poignant questions to Ms Lagarde and the bank’s Chief Economist, Philip Lane, which remained largely unanswered. Mr Prache stated that the way in which the ECB has been pursuing financial stability, by favouring short-term financial support to financial institutions over the protection of financial consumers, is driving unprecedented Financial Repression[1]. “Pension products are by essence long-term investments”, he added, “and the cumulative effect of inflation, even at a modest average rate of 2%, over 40 years would reduce the real value of savings by 55%. This is financial repression in action. EU Pension savers are at risk of becoming the victims of “money illusion” and unknowingly face the erosion of their long-term purchasing power and pension adequacy upon retirement.” Another global challenge the ECB could play an important role in tackling is Climate Change. As part of its secondary objective (price stability being the ECB’s primary objective), i.e. to support the general economic policies in the EU, including employment, growth, climate change, and the quality of the environment, BETTER FINANCE believes the ECB should help internalise critical “externalities” that are not priced by markets. During the #ECBListens event, Guillaume Prache proposed for the ECB to request the beneficiaries (private banks and EU Governments) of the ECB’s de facto subsidies (”negative” interest paid by the ECB on its loans to banks and on government bond purchases) to allocate a minimum percentage of these subsidies to support activities that address Environmental, Social, and Corporate Governance (ESG) issues, and to hold these beneficiaries accountable by requiring reporting on key ESG improvement indicators. Ms Lagarde pointed out that at this stage the ECB does not have the tools yet to filter their asset buying programme for sustainability criteria, but that taking ESG factors on board is part of the duty of the ECB in view of the impact on price stability and risk management. In this respect, BETTER FINANCE agrees with Ms Lagarde that the EU Taxonomy, which will come into effect in 2022, needs to be improved to ensure that investments are truly sustainable.
“Citizens want real results and impacts, not 'greenwashing'”, Mr Prache concluded. [1] The term “financial repression” was introduced in 1973 by Stanford economists Edward S. Shaw and Ronald I. McKinnon. Financial repression comprises policies that result in savers earning returns below the rate of inflation to allow banks to provide cheap loans to companies and governments, reducing the burden of repayments. More information: BETTER FINANCE Blog: BETTER FINANCE addresses #ECBListens Event on the Impact of Monetary Policy on Global Challenges | |
| BETTER FINANCE globally welcomes EC proposal to simplify Prospectus disclosure rules | | |
| The BETTER FINANCE welcomes the proposal put forward by the European Commission to simplify Prospectus disclosure rules for equity issuers in order to stimulate equity financing by companies in need and restore sustainable debt-equity ratios. We believe that both Capital Markets Union (CMU) and COVID-19 recovery policies should be tailored to attract more EU households to directly invest in the real economy and rebecome the main owner of EU listed companies. Considering the very low level of confidence non-professional investors have in financial institutions and stock markets, CMU and recovery policies should primarily aim to restore trust and impose a high standard of investor protection. During the work of the High-Level Forum on the Capital Markets Union, BETTER FINANCE has supported initiatives to alleviate Prospectus rules in order to improve the public markets ecosystem and help revive an EU equity investing culture. More information: DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2014/65/EU as regards information requirements, product governance and position limits to help the recovery from the COVID-19 pandemic EC Coronavirus response: How the Capital Markets Union can support Europe’s recovery BETTER FINANCE Position on the EC Proposal for an EU Recovery Prospectus | |
| Coming Up | | |
| REPORTS First BETTER FINANCE Sustainable Investment Funds Research Report: Are “green” funds really green? How do they perform compared to other investment funds? The answers this month, watch out for the release! Robo-Advice Research Report: For the fifth year in a row BETTER FINANCE is taking a closer look at the robo-advisory business from the perspective of individual investors and savers. Watch this space for the launch of the 2020 Edition of this important report. ELTIF Research Report: Watch this space for the upcoming release of the BETTER FIANCEN Report on "Obstacles to the Development of the EU ELTIF Market" EVENTS 2 December 2020 - International Conference - European Capital Markets’ Union & the New Green Deal: Registrations for the upcoming joint DSW and BETTER FINANCE International Conference on 2 December in Frankfurt are now open. This year the conference will focus on “European Capital Markets’ Union & the new Green Deal”. We are proud to present high level keynote speakers, such as Verena Ross from ESMA in Paris, Mairead McGuinness, European Commissioner for Financial Stability, Financial Services and the Capital Markets Union and Didier Reynders EU-Commissioner at DG Justice from Brussels. Panels will discuss topics such as: • Companies in Transformation
• Sustainability and Active Investors
• Virtual Shareholder Meeting – experiences in Europe
• Sustainability and Profitability – a Contradiction in Terms?
• How can we measure Sustainability?
• ESG – the new normal
• New responsibilities of the Board – taking ESG into consideration | |
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