As soon as you have a little money to spare, dangers lurk everywhere. In the savings bank, where consultants sell their customers unnecessary savings products. At home at the dining table, where the financial broker advertises funds that promise little returns but high costs. Or on Instagram, where influencers advertise financial products that are supposedly not to be missed. From the point of view of financial market politicians, investors are creatures worthy of protection whose power and decision-making authority should be strengthened. For this reason, numerous officials in the European Commission have recently been dealing with the issue of investor protection. The authority found that it needed an update.
The result is the “small investor strategy”, a legislative package, with which the Commission is making numerous adjustments in several sets of rules at the same time. In the future, investors should get a better overview of the opportunities, risks and costs of financial products. Advertising is being pushed to new limits and regulators are to use benchmarks to assess the value for money of financial products. “Our goal is to boost investor confidence,” says an EU official. That is not pronounced enough, which he illustrates with a number: Across the EU, only 17 percent of private savings are in investment products, not counting insurance.
The official speaks of a “further development” of investor protection. The Commission is now jumping much shorter than originally planned. Financial Markets Commissioner Mairead McGuinness would have liked a total ban on commissions. This sharp sword, for which there would have been no majority among the member states anyway, is not even drawn now. Instead, she now relies on a commission ban light: According to the draft, if customers purchase financial products without prior advice, for example online from direct banks and brokers, no more payments should be made in the future. The financial industry will be able to live with that.
Hidden costs for bank customers remain
Consumer advocates initially cheered when McGuinness’ ideas for a commission ban became known in December. Fund companies, for example, pay sales commissions to financial advisors and banks when they sell their products. Sometimes money flows to the seller every year via portfolio commissions.
Savings banks and Volksbanks, private banks and independent financial distributors such as Deutsche Vermögensberatung earn a lot of money with this model. For customers, however, these commissions have so far been hidden costs. On the other hand, fee-based advice, where you pay your advisor directly, is the exception.
A ban on commissions, which of all EU countries only exists in the Netherlands, would have upset business models across Europe and deprived financial advisors of their business basis. “An overnight ban would have been too disruptive,” said McGuinness on Wednesday at the presentation of the plans, citing “intensive discussions with the industry”. However, the ban is not ruled out forever. The legislative package is to be reviewed three years later once it has been finally agreed and passed by the European Parliament and the Council of Ministers. “We’re not giving vendors a get-out-of-jail-free card today,” McGuinness said.
Customers should receive an annual overview of costs and income
If they continue to pay commissions, consumers should at least be able to see this at a glance. Providers are obliged to provide precise information about commissions and their effects. Customers should also receive an overview of running costs and their income every year, including commissions. The product information sheet – the mandatory information leaflet for financial products – should also be clearer, with a summary of costs and risks at the top of the document. In the future, it should also contain mandatory information on the sustainability of a financial product.
The insurance regulator Eiopa and the securities regulator Esma are also to develop reference values to evaluate the price-performance ratio of financial products. Providers and sellers would then have to explain the cost-benefit ratio to the financial regulator before they put their products on the market.
Consumer advocates are disappointed
For the first time, the Commission is also taking on the flood of investor advertising on social media. Financial firms are increasingly collaborating with influencers who promote their products, such as makeup, gym clothes or travel destinations. The draft presented on Wednesday stipulates that providers will have to be liable for the advertising of influencers in the future. Accordingly, they should be responsible for ensuring that every advertisement contains all the essential product information and addresses the appropriate customer group.
In particular, this means “that a highly complex and risky product should not be marketed to a very broad audience,” according to the Commission. “Companies will therefore have to be more careful about who they do business with and what information is disseminated on their behalf.” Or else: They will hold their influencers contractually liable.
Consumer advocates were disappointed on Wednesday. “Commissions lead to profits for sellers, but reduce returns for investors,” says Dorothea Mohn from the Federal Association of Consumer Organizations. “Only a commission ban would get to the root of the problem.”