| Review of the Directive on Financial Market Instruments (listed stocks and bonds and investment funds): making the case for improved Investor Protection and Unbiased Advice |  | |
The EU’s revised Markets in Financial Instruments Directive and associated Regulation – jointly referred to as MiFID II – constitute a framework of EU financial markets rules that took effect on 3 January 2018. The legislation, with its 1.7 million paragraphs of documentation, includes several improvements for investor protection. However, it has also generated a new surge in “dark” capital market venues at the expense of regulated and “lit” ones and therefore at the expense of individual investors, contrary to the CMU objectives. It has also failed to curb the very damaging conflicts of interests in the distribution of “retail” investment products due to the unabated and massive use of kickbacks to compensate “advisors” (“inducements” in MiFID jargon). In response to the increasing frustration, the EU announced in 2019 that it will review MiFID II rules in 2020. Steven Maijoor, chair of the European Securities and Markets Authority (ESMA), stated in November 2019 that “MiFID II requires a large number of follow-up review reports and we have started working on many of those.” The Financial Times reported that “issues that are set to be reviewed by the European Commission include changes to the cost and distribution of market data, investor protection rules, and research for small companies”. On 17 February 2020, the EC launched the public consultation on the review of MiFID II and MiFIR level 1, in parallel with ESMA’s public consultations on several other issues pertaining to MiFID II and MiFIR level 2 rules (more information below in the section on upcoming consultations). In view of this review of MiFID II, BETTER FINANCE is organising an international conference in Vienna on 24 April, together with the World Federation of Investors (WFI) and the Austrian Shareholder Association (IVA), to discuss the main issues faced by individual investors. Whereas BETTER FINANCE strongly supports the directive's main objectives of increasing competition and investor protection in investment services, many issues negatively impacting individual investors still need to be addressed. The Conference - MiFID II: making the case for Real Investor Protection and Independent Investment Advice – will focus on putting an end to conflicts of interests and inducements and on the need to differentiate between inexperienced and experienced investors. More information: - Conference Programme: "MiFID II: making the case for Real Investor Protection and Independent Investment Advice - Vienna 24 April 2020"
- CityWire: "EU to amend Mifid II rules to appease industry frustrations"
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| High-level Debate on the Ambitious but Vague EUROPEAN GREEN DEAL: will it provide EU citizens with Sustainable Value for Money? |  | |
The new President of the European Commission called the European Green Deal “Europe’s man-on-moon moment”. As the most important shift in European energy policy in the last two decades, aimed at reaching carbon neutrality by 2050, the Green Deal is indeed ambitious and can count on strong support from BETTER FINANCE. But are the proposed measures sufficient? Will the Green Deal put us on the moon? Whereas the objectives set out by the European Green Deal are steps in the right direction and put the continent on a more sustainable path, the Commission’s aim of achieving carbon neutrality by 2050 is already at risk, since the reduction in carbon emissions by 50-55% by 2030 targeted by the Green Deal still falls short of the necessary reduction of at least 60-65% in order to reach that target. The financing of the Green Deal also raises questions. The Commission intends to mobilise 3 trillion euros over 10 years via public and private funds and even though this figure may seem impressive at first, it might not be enough to reach the estimated targets. Whereas BETTER FINANCE welcomes the idea of getting additional funding by mobilising Members States and national investments through a reform of the EU fiscal framework and Energy Taxation Directive by authorising the long-term exemption from EU fiscal rules for green public expenditures, it will be crucial to extend the Emissions Trading System to other sectors and implement an ambitious EU-wide carbon tax targeting high carbon and other GHG (methane in particular) emitters. It is crucial for the EU Commission to walk the talk and genuinely reorient capital flows towards investments that really impact the environment and global warming in particular. Unfortunately, so far, BETTER FINANCE is rather concerned with the shortcomings of the design of specific measures that are meant to increase opportunities for individual investors to identify sustainable investments. For instance, the EU Ecolabel for retail financial products sets new parameters that would allow investment funds with only 18% of their weighted revenue coming from “green” listed companies to be awarded the label. Such a low threshold would mislead individual investors into greenwashed products, thus undermining the credibility, not only of the Ecolabel, but of the entire European Green Deal. A well-designed and controlled ecolabel should be based on a clear and science-based taxonomy. At the end of 2019, EU co-legislators struck a provisional agreement to establish common European rules on what can be considered a green investment, that in BETTER FINANCE’s opinion still falls short of representing “a single grammar to greening financial markets”. It is crucial to introduce a clear and compulsory taxonomy that should not be left to the discretion of index-providers when selecting the underlying assets. Moreover, to ensure their relevance, BETTER FINANCE asks, first, that any ESG label ensure exemplary compliance with EU investor protection and information rules and, second, that those ESG funds are benchmarked against objective mainstream benchmarks to allow investors to check whether the ESG approach made any difference over the long-term and whether they created any long-term and sustainable value for EU savers. Finally, “green” investment products should disclose what actual impact on the real economy they target, measure it, and report it. In particular, shying away from European listed oil majors instead of engaging in their strategy and long-term plans as engaged shareholders, does not seem to have any positive impact on the energy transition, most probably the contrary is true. In the end, in as far as “sustainable finance” is concerned, the responsibility of policy makers is to reconcile the financing of a greener economy with defusing the pensions time bomb, addressing the latter by ensuring a fair deal for EU citizens as pension savers. On 14 March BETTER FINANCE will address these issues during the Stakeholder Dialogue on Sustainable Finance organised by the European Commission to dicuss the final reports of the Technical Expert Group. Judith Hardt, senior consultant for BETTER FINANCE, will join the Panel on the Renewed Sustainable Finance Strategy. Further reading: - BETTER FINANCE response to the EC Consultation on the Development of EU Ecolabel Criteria for Retail Financial Products
- Closing Speech by Guillaume Prache at the Sustainable Value for Money Conference: "EU citizens for Sustainable Value for Money"
- BETTER FINANCE Feedback on the draft technical advice on minimum requirements for the EU climate transition benchmarks and the EU Paris-aligned benchmarks and benchmarks’ ESG disclosures
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| Urgent Need for a Review of the Regulation on the Key Information Document for “retail” investment products |  | |
BETTER FINANCE is a staunch supporter of the stated aim of the regulation on packaged retail and insurance-based investment products (the "PRIIPs" Regulation), namely, to provide investors with essential information in a short, comprehensible format which allows for easy comparison with similar products. Unfortunately, as stressed by BETTER FINANCE on many occasions over the last few years, the design of the PRIIPs KID (Key Information Document) runs counter to the commendable objective of “enabling retail investors to understand and compare the key features and risks” of the PRIIP. In February 2020 the European Commission (EC) published its final report of the consumer test it carried out in order to establish retail investors’ preferred option regarding performance scenarios and past performance information within the Key Information Document (KID) under the PRIIPs framework. The online consumer test presented 7,684 participants with different versions of the key information document (KID) for funds, structured products and IBIDs, with the objective of testing the effectiveness of different contents and formats of presenting information on past performance and potential future performance (performance scenarios) of PRIIPs so that this information is most useful and well understood by retail investors, allowing them to compare and select the best PRIIPs for their investment needs. Whereas the EC stresses that “the results of this consumer test suggest that the final investment decision is not affected by the version of the KID”, the results also indicate that including past-performance information in the KID “improved the accuracy of answers”, as well as showing that “participants seemed to distinguish between past and future performance of the products and understand that future performance cannot be accurately predicted by information on the past”. Unfortunately, the consumer testing clearly shows the limitations of they current design of the PRIIPs KID, since it highlights an overall very low understanding among the participants of any of the KID versions with the share of correct answers to most of the questions generally hovering around a dismal 30%, especially considering that most participants were high-income earners with previous experience with investments and a fairly high level of financial literacy. This calls into question the usefulness of the current proposals of the EC and is the reason why BETTER FINANCE reiterates the urgent need for a comprehensive review of the PRIIPs Level 1 Regulation and address several issues pertaining to the presentation of costs as well as performance scenarios. As things stand, the design of the PRIIPs KID makes it impossible for investors to compare financial products or make informed decisions about their investments. The elimination of the requirement for the disclosure of past performance of the PRIIPs and their chosen benchmarks in favour of ‘four future performance scenarios’ without any benchmarks, leaves retail investors confused and in the dark as they will not know whether these products met their investment objectives or made any money in the past or not. Worse, the use of performance projections will allow providers to use forecasts of future returns to tempt and mislead retail investors by using excessively optimistic performance scenarios. Further Reading: - BETTER FINANCE's Overview of PRIIPs
- European Commission's (EC) Consumer Test on Retail investors’ preferred option regarding performance scenarios and past performance information within the Key Information Document under the PRIIPsframework
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| High-Level Forum on the Capital Markets Union: lest more is done to attract EU Households into Capital Markets, the CMU project will fail |  | |
Whereas BETTER FINANCE is happy to have been appointed to the High-Level Forum on the "CMU", it stresses that giving individual users of financial services a stronger voice in the EU regulatory processes has sofar not been achieved, even though it is key. Even though one of the three subgroups specifically deals with how to “promote greater retail investors’ participation” and that the stated aim of the High Level Forum is to “propose targeted policy recommendations for future CMU actions, to ensure that citizens and businesses can access capital markets across the EU on equal terms and irrespective of their geographical location”, only 2 out of 28 members of the group are representatives of citizens as financial users. Financial behemoths from the US alone (Bank of America, JP Morgan, BlackRock, BNY Mellon, Chicago Board of Exchange) on the other hand, count with five representatives, although surprisingly mostly are listed as having been appointed in a “personal capacity”. BETTER FINANCE believes that the possible relaunch of the CMU initiative provides a unique opportunity to return capital markets to their natural participants, i.e. end-investors and non-financial issuers. There is an abundance of investable private capital in Europe, with households desperately looking for positive real returns on their long-term and pension savings in an environment of ever lower interest rates, high and opaque fees, complex investment products and financial repression. European citizens as savers and investors stand to greatly benefit from a well-designed CMU, aimed at strengthening the link between their savings and the real assets into which their funds are deployed, as well as providing better returns. The European Commission itself highlighted that EU households are the main source of long-term financing for the real economy and that, for the CMU to succeed, European citizens, as individual investors and savers, should be at the heart of the project. Unfortunately, so far, any real “boost” of retail investments into capital markets has failed to materialise, quite the contrary in fact. There is ample room for improvement, in particular with regard to the distribution and advice on "retail" investment products, investor protection and redress, SME access to financing on public markets and the improvement of long-term returns for savers. We’re at a crossroads where we must choose between leaving fragmented and under-developed capital markets in the sole hands of financial intermediaries or seize this unique opportunity to develop EU capital markets by making them work for the people. BETTER FINANCE is encouraged by the recent “Next-CMU” Report, sponsored by several Member States, which also calls for the new phase of the CMU to give “priority to responses to citizens’ needs”, by giving “access to fair advice”, encouraging employee share ownership and incentivizing “savings in simple and transparent long-term financial instruments like single shares and ETFs”. Further Reading: | |
| Towards a Pan-European Personal Pension Product |  | |
BETTER FINANCE was pleased to have two of its experts selected for EIOPA’s Expert Practitioner Panel on the Pan-European Personal Pension Product, who will have their work cut out for them ahead of the entry into force of the PEPP Regulation on 14 August 2020. Quite a few issues remain to be addressed for EU Citizens as savers: - As it stands the PEPP Regulation is anti-CMU (see previous story) since it bars pension savers from opting for plain vanilla listed stocks, bonds and index ETFs in the PEPP;
- The current design of the PEPP default option does not protect the long-term purchasing power of pension savings : a nominal long-term capital “guarantee” is not a real one, since even with an average inflation as low as 2%, it could destroy 55% of the value of such pension savings over 40 years;
- The PEPP KID is based on pension projections, rather than actual past performance information: just like for the PRIIPs KID, the elimination of the requirement for the disclosure of past performance and of its chosen benchmark in favour of “future performance scenarios” will allow providers to use forecasts of future returns to tempt retail investors who will not know whether these products have actually made or lost money in the past;
- The printed version of the PEPP KID is 5 pages long, providing an enormous amount of information with little or no added value, leading to information overload which demotivates people from reading it. The KID should first be designed for digital use;
- The annual cost cap for the basic PEPP of 1% must be all inclusive;
- Investment advice should not be mandatory for the basic PEPP and should be independent.
BETTER FINANCE will work towards addressing these issues over the coming months: - BETTER FINANCE is responding to EIOPA’s Consultation concerning technical advice, implementing and regulatory technical standards for the Pan-European Personal Pension Product (level 2 rules)
- BETTER FINANCE will publish a Position Paper on PEPP, which will be accompanied by a Technical Working Paper and a digitally enabled BETTER FINANCE mock PEPP KID
More information: - Short video and petition: "Stop the Capital Guarantee Scam & Get the PEPP Pension You Deserve"
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| European Proposal for Financial Transaction Tax (FTT) disproportionately targets EU Citizens rather than Financial Institutions |  | |
For six years now the Council has been stalling negotiations for a European Financial Transactions Tax (FTT), though renewed discussions took place following a note from Germany in June 2019, urging the Council to resume negotiations and use the FTT already in place in France as basis. Rather than focussing on transactions between financial institutions, as per the commendable stated objective of the FTT, the current proposal once again targets EU Citizens as Savers and end-investors whilst the financial industry escapes scot-free. A genuine FTT, serious about its intention of having financial institutions contribute to the cost of their post-crisis rescue, would need to tax the main financial transactions between themselves, such as forex transactions, especially forex derivatives, as well as interest rate derivatives, rather than focusing on trades in listed equities and bonds which mostly impact non-financial investors. Unfortunately, none of the issues with the FTT raised by BETTER FINANCE in 2013, are addressed by the German proposal. In short, the FTT proposed would levy a 0.2% tax on all equity trades worth more than €1 billion, leaving forex transactions, bonds, derivatives and high frequency trading unaffected. More information: | |
| VIDEO: Why invest in shares? |  | |
BETTER FINANCE and INVESTAS, the Luxembourg Association of Individual Shareholders, published an educational video about investing in shares. For now the video is only available in French. Watch this space for the English version! - Video: "Pourquoi investir en actions?"
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| Upcoming Consultations |  | |
MiFID II Review: - March 17: ESMA Consultation on the MiFID II/ MiFIR review report on the transparency regime for equity and equity-like instruments, the double volume cap mechanism and the trading obligations for shares
- March 18: ESMA Consultation on the MIFIR Report on Systemic Internalisers
- March 31: ESMA Consultation on the draft technical standards on the provision of investment services and activities in the Union by third-country firms under MiFID II and MiFIR
- 20 April: European Commission Public consultation on the review of the MiFID II/MiFIR level 1 regulatory framework
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| Upcoming BETTER FINANCE Events | |
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