AFME has outlined member concerns around the EU Retail Investment Strategy proposals, responding to the EU Commission’s ‘Have your say’ consultation on the matter.
The first area that AFME highlights is value for money. The association suggests that the benchmark-based approach proposed in the strategy is prescriptive, and will not be consistent or accurate when assessing cost and performance.
It adds that a product or investment’s value is subjective and dependent on investor preferences. Taking qualitative data into consideration and incorporating an outcomes-based approach would help to improve value for money for investors, as there will be less chance of a benchmark overlooking relevant factors, it says.
Regarding best interest, AFME states that it “does not see a compelling rationale to revise existing Best Interest requirements in the MiFID inducements rules.” Proposals around best interest from the Commission will increase pressure on firms and appear to be duplicative of value for money proposals, it notes.
If these proposals are accepted, several key parameters beyond cost will be ignored when investment advice is given. As such, AFME warns that the value of investment advice could be “downgraded”, with retail clients pushed towards lower cost products when alternatives could be more lucrative in the long term.
Proposed bans on inducements for non-advised services, pertaining to packaged retail and insurance-based investment products, will need to be adjusted in scope and in terms of rules in order to prevent overly broad implementation.
AFME advises that a review of the retail investment strategy should take place five years after amendments are fully operational, rather than the proposed three. It emphasises the need for the review to have clear criteria, including how the effectiveness of revised inducement provisions are measured when managing conflicts of interest. The association adds that inducement changes should not be considered in isolation, but that the entire package of the strategy should be considered as a whole.
Finally, AFME offers its approval of the proposals’ measures to allow more experienced retail investors to ‘opt up’ to professional client status. By doing so, a range of investment opportunities will be available to a greater number of clients, potentially increasing available capital for issuers in EU capital markets. However, more clarity is needed around the scope of the ‘opt up’ criteria and regarding what evidence will be required for investors to prove their financial expertise.
Adam Farkas, CEO of AFME, says: “AFME strongly supports the Commission’s objective of making the distribution of securities to European retail investors more efficient. We also support the Commission’s ambition to significantly raise the percentage of European retail investors’ direct and indirect participation in EU capital markets.
“However, in view of the fact that a significant number of investment products distributed to retail investors are sourced and manufactured by wholesale banks, asset managers and insurers, AFME is concerned by the many ways that the Retail Investment Strategy could impact wholesale capital markets, as well as the availability of investment product for retail investors, reducing rather than enhancing their choice. AFME believes that alternative approaches, including those used in other jurisdictions, should continue to be carefully explored based on their success to ensure the effectiveness of the proposals.”
