DECEMBER 2019

High Level Forum on CMU | Review of the PRIIPs KID | Greenwashing | 2019 Research Reports | PEPP Consultation | Next CMU | Losing Products | Climate Risk | Job Vacancy | Upcoming Events & Research | Season's Greetings

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On 18 November 2019, the European Commission (EC) announced the composition of its high-level forum on the Capital Markets Union (CMU). 28 experts from the business and finance sectors, civil society and other non-public sector institutions will provide support and insights towards the Commission’s goal of further developing and finalising the CMU. The forum is made up of three sub-groups focusing on:

• the creation of an ecosystem enabling greater capital raising, with particular focus on innovative SMEs;
• the development of the European capital market architecture, paying particular attention on how new financial technologies can support this process; and
• investment choice and accessibility to capital markets services to promote greater retail investors’ participation

Unfortunately, only 2 out of 28 members of the group are representatives of citizens as financial users. BETTER FINANCE’s Managing Director, Guillaume Prache, was selected to represent EU Citizens as Savers and Investors and is also the only representative of individual shareholders. Achieving “a CMU that works for people” has been a priority for BETTER FINANCE since the inception of the CMU in 2015.

Whereas BETTER FINANCE is happy to have been appointed to the High-Level Group on the CMU, giving individual users of financial services a stronger voice in the EU regulatory processes remains key. After all, as BETTER FINANCE stressed in a recent Press Release: “lest more is done to attract EU Households into Capital Markets, the CMU project will fail”.

• More information: High-Level Forum on Capital Markets Union

BETTER FINANCE has always strongly supported the aim of the PRIIPs regulation, requiring packaged retail and insurance-based investment products (PRIIPs) to publish a short and easy-to-understand key information document (KID) in order for individual investors to understand and easily compare the key features of a product and the risks associated with it with similar documents for other products. PRIIPs, in layman terms, are investment funds, life insurance contracts and bank sctructured savings products.

It is the first – and so far, the only - “horizontal” EU set of investor protection rules applying to both non-insurance based and insurance based retail investment products. Unfortunately, as things stand, the design and execution of the PRIIPs KID run counter to its commendable objective of “enabling retail investors to understand and compare the key features and risks of the PRIIP”.

In this light BETTER FINANCE has once again reiterated the urgent need for a review of the PRIIPs Level 1 Regulation, which in any case is legally required by the end of 2019, as well as the delegated Level 2 regulation, in order to address several issues concerning the presentation of costs and performance scenarios:

• Future performance forecasts are wrong, misleading and based on 5-year past performance. They only add to the confusion of individual investors, reasons for which these should be eliminated and replaced by the actual relative past performance of the product alongside its benchmark;
• Future fee estimates through the Reduction-in-Yield (RiY) method do not help retail investors understand how much a product costs, nor does it indicate whether it costs more or less than other similar products. These should be replaced by the actual fees charged in the last year.

Most importantly, any PRIIPs Regulation review must ensure that the KID:

• Enables comparison between different types of investment products;
• Complies with the MiFID II principle of providing “fair, clear, and not misleading” information;
• Does not create unnecessary reporting burdens for issuers of securities.

More information: BETTER FINANCE is closely monitoring any developments related to the RPIIPs Regulation and set up a webpage with information and recommendations.

On 20 November, BETTER FINANCE joined forces with the CFA Institute and held a conference on the subject of “Sustainable Value for Money”, also launching their eponymous report.

Besides many crucial issues relating to sustainable finance, one of the concerns repeatedly mentioned by the participants and stakeholders at the conference, was the harmful practice of “greenwashing”, defined by Investopedia as “the process of conveying a false impression or providing misleading information about how a company's products are more environmentally sound […] to deceive consumers into believing that a company's products are environmentally friendly”.

If the European Union is at all serious about “sustainable finance”, and if it is to stand any chance of gaining investor trust, greenwashing needs to be avoided at all cost. BETTER FINANCE believes this can only be achieved if:

• the EU classification system for sustainable activities, the “taxonomy”, adopts a high level of science-based standards for green financial products and an ambitious Ecolabel with high environmental standards
• a uniform and harmonised classification system determining the activities that can be regarded as environmentally sustainable for investment purposes, is rolled out across the EU
• such a taxonomy is mandatory and not left to the discretion of index-providers when selecting the underlying assets
• the creation of an EU ecolabel for investment products complies with rigorous environmental standards, steering clear of marketing tactics used to deceive environment-conscious consumers

With six published research reports, 2019 was a record year for research by BETTER FINANCE. By ramping up our research output, BETTER FINANCE responds to the need for more independent and unbiased research in financial services. Our findings help BETTER FINANCE to design policy positions and recommendations aimed at improving EU financial legislation and rules for EU Citizens as individual investors and financial services users. To reflect this evidence-based approach, BETTER FINANCE also set up a Scientific Council of highly skilled and experienced independent academics who help us deliver high quality research.

BETTER FINANCE published the following six studies dealing with issues of importance to individual investors such as the Capital Markets Union, FinTech, EU Pensions, Sustainable Finance and the Costs and Performance of Equity Funds:

• May: "Efficient Portfolio Management Techniques: Attribution of Profits Derived from Securities Lending by UCITS Exchange-Traded Funds" | Press Release: "Fund Managers frequently pocket large portions of the Revenues of Securities lending"
• June: "Study on the Correlation Between Cost and Performances in EU Equity Retail Funds" | Press Release: "The More You Pay, The Less You Are Likely to Get"
• September: "Pension Savings: The Real Return – 2019 Edition" | Press Release: "Pensions Inadequacy: The High Fees often charged by European Pension Providers prevent many EU Citizens from enjoying a Decent Retirement"
• November: "CMU Assessment Report 2015-2019" | Press Release: "Lest more is done to attract EU Households into Capital Markets, the CMU project will fail"
• November: "Report on Sustainable Value for Money" | Press Release: "Green investment products should not be developed at the expense of EU Citizens as long-term and pension savers and should first of all ensure long-term and sustainable value creation"
• November: "Robo-Advice: A Look Under the Hood 2.0." | Press Release: "A Look Under the Hood 2.0.: Robo-Advice Holds Great Promise but Disappoints on Suitability"

On 2 December EIOPA launched the public consultation on the regulatory and implementing standards, as well as its technical advice to the European Commission on delegated acts, with regards to the development of the Pan-European Personal Pension Product (PEPP).

EIOPA is looking for feedback from stakeholders on its proposals for several key elements of the future PEPP, including:

• PEPP information documents: pre-contractual and annual information on the PEPP and its investment options have to be highly standardised to allow for comparability between PEPPs and for the consumer to track the performance of the chosen PEPP. The information needs to be relevant and tailored to the pension objective of the PEPP. The proposals [by EIOPA] are built on the experience with packaged retail investment and insurance-based products (PRIIPs) and the Directive on the activities and supervision of institutions for occupational retirement provision (IORP II), yet tailored to the specificities of PEPP, in particular its long-term nature, whilst making the PEPP ready for digitalisation.
• Cost cap of the Basic PEPP: the cost-efficiency of the Basic PEPP is enforced by the introduction of a cost cap. In line with the PEPP's policy objective, an 'all inclusive' approach is suggested, while ensuring a level playing field amongst providers offering different features and in particular a guarantee on the capital invested.

BETTER FINANCE thanks EIOPA and would like to take this opportunity to once again stress the need for a real Capital Guarantee for the PEPP.  For a “capital guarantee” to mean anything, “capital” must be equal to the amounts saved, i.e. before the deducting all accumulated fees and charges directly or indirectly borne by pension savers, and, if possible, in real terms (offsetting the devastating impact of inflation on the “real” value of pension savings – their purchasing power - over time). Without such a protection covering the real value of capital invested (without deducting fees over decades), the purchasing power of the “capital guarantee” upon retirement will amount to just a small fraction of their lifetime savings.

EIOPA invites all stakeholders to contribute to the consultation. The deadline is set for the 2nd of March 2020.

More information:

• Short video and petition: "Stop the Capital Guarantee Scam & Get the PEPP Pension You Deserve"

On 9 October the Next CMU High-Level Expert Group (HLEG) - composed of experts from Germany, France, the Netherlands, Italy, Spain, Poland and Sweden who are charged by their governments with analyzing the EU’s market-based financing capacity five years after the launch of the Capital Markets Union (CMU) - published its report on the CMU, entitled “Savings and Sustainable Investment Union”.

BETTER FINANCE, as the representative of EU Citizens as Savers, Investors and Financial Services Users, was heard by the HLEG on the 7th of July 2019 and significantly contributed to the debate, shared relevant independent research and provided evidence-based policy recommendations. We are therefore pleased to see that the final HLEG report took BETTER FINANCE input into account and has adopted and endorsed several BETTER FINANCE policy recommendations* with view on the future development of a CMU.

Whereas BETTER FINANCE has always been a strong proponent of an efficient CMU with EU households at its heart, the idea has too often been dominated by financial stability concerns, at the expense of consumer protection and EU citizens in general.

What’s more is that the Commission’s CMU flagship seems to be at risk of having the wind taken out of its sails by the latest tendency to put “Sustainable” Finance initiatives first. Whereas BETTER FINANCE firmly believes that it is essential to promote a cleaner and fairer economy, this should never happen at the expense of long-term and pension savers.

It is with a sense of relief then that BETTER FINANCE notes that the HLEG report addresses these concerns head-on, stating that European capital markets have now sufficiently recuperated and stabilized for CMU efforts to now pass on to the next stage and focus on EU citizens and SMEs.

Many of the research findings and policy recommendations championed by this report resonate with proposals put forth by BETTER FINANCE since many years, including those developed in our contributions to the HLEG report. The report is also significantly aligned with our Key Priorities for 2019-2024, including the need for “better, cheaper, and simpler investment products”, a focus on “long-term equity financing”, simplified ”access to the public markets for SMEs and Mid-Caps” and a “reassessment of the regulatory and supervisory balance”.

*See the BETTER FINANCE CMU Assessment Report p. 33

• More information: Press Release - "Capital Markets Union given a New Breath of Life in New HLEG Report putting Sustainable Finance firmly at its Core"

According to a recent report by Consob, the Italian financial watchdog, 63% of Italian savers are loss averse. Yet, their top choice (and increasingly so) is bank accounts. For years, those have, on average, been steadily destroying the real value of Italian bank savings (their purchasing power) after deducting the impact of fees and inflation.

In 2018, Italian savers also increasingly poured their savings into life insurance at a time when the majority of guaranteed life insurance contracts also started to generate negative net real returns. The worst thing is that savers are not even really aware of it.

This raises serious concerns about the transparency of disclosures and warnings on performance and fees of “packaged” savings products, and whether key information documents are really providing “fair, clear and not misleading” information that can easily be understood by savers.

It also raises the question of potential mis-selling. Since savings products are “sold” rather than “bought”, it would seem financial intermediaries are not taking the interest of savers at heart.

The situation is worsened by the fact that Italian savers are no longer investing in listed equities and bonds and never really saved into low cost index funds: all products that have delivered positive net real returns on a whole since the beginning of this century.

The issue is that most Italian savers are not told about these products by their “advisors”, who are paid for selling specific products to them, and not for advising them. Isn’t it time to call a cat a cat, and rename what is clealry “non-independent advice” to what is really is: a sales pitch?

Authorities need to heed the advice from the “Next CMU” report, released last month and sponsored by the Governments of Germany, the Netherlands and … France, and ensure “fair advice”.

The time has come to follow the example of the UK and the Netherlands where such sales commissions for advice to retail advisors were banned.

Further Reading:

• Report: The Next CMU High-Level Group - Savings and Sustainable Investment Union

In early December Daniela Gabor of the University of Bristol was quoted in the FT as saying that "financial markets misprice climate risks, and monetary policy operations reproduce this market failure".

Although financial markets are far from perfect, there is no such mispricing, since climate is a public good, and anthropogenic climate warming is what economists call a negative externality. It is a bit like accusing capital markets of mispricing the air we breathe. Financial markets actually do not price public goods at all.

The failure is not one of markets this time but one of Public Authorities who fail to address this negative externality by not imposing a carbon tax, or better, a Greenhouse Gas (including methane which is even more detrimental than carbon dioxide) tax on those activities that release them.

Policy makers should take their core responsibility seriously and stop blaming the anonymous and ubiquitous "financial markets", which - at the end of the day – means pension savers.

BETTER FINANCE is looking for a full-time Finance Officer to join the team in Brussels. The successful candidate will be responsible for the day-to-day office management, office finances & HR, administration and coordination and communication with members.

More information: Please read the full job posting here.

Events:

• 24 April 2020: Joint BETTER FINANCE & WFI Conference - "MiFID II: making the case for Real Investor Protection and Independent Investment Advice"
• 2 December 2020: Joint BETTER FINANCE and DSW Conference in Wiesbaden focussing on shareholder rights

Planned Research

• January 2020: BETTER FINANCE Research into Sustainable Investments in UCITS Funds: the study will take an in-depth look at the investment funds registered in the largest UCITS domicile in the EU to assess the accuracy of, and compliance with, disclosure requirements regarding investments labelled as sustainable.
• February 2020: EPMT – Attribution of Revenues from Securities Lending in EU Investment Funds: this second research phase into securities lending by BETTER FINANCE will provide a follow-up to the May 2019 report and an expansion of the material and geographical scope of the report.
• September 2020: For the 8th year in a row BETTER FINANCE will continue and expand its research into the real return of long-term savings products across Europe: "Pension Savings - The Real Return - 2020 Edition".