“The directive includes some controversial proposals… which are shaking the market,” writes the ABBL in its description of a webinar held on 12 October and which anticipated the impacts of the European Commission’s new text on retail investment strategy (RIS).

The EC’s proposal, , seeks to make it safer for people to make long-term investments, and thus participate more, in European capital markets.

Dorian Rigaud, partner at EY, outlined the scope of the problem in his introduction during the webinar: “Forty-five percent of EU retail investors are not certain that the investment advice they receive is in their best interest.”

His colleague Benjamin Accadia, also a partner, added that only 17% of EU household assets were held in financial securities in 2021 and fees paid by retail investors were estimated to be 40% higher than those paid by institutional investors.

These numbers argue for the importance of further guidance in this area, hence the European Commission’s efforts, but that the proposal is nevertheless flawed.

The best-interest test

Part of the EC text pertains to ensuring that financial advice is aligned with retail investors’ best interests. This would be done by means of a test--the “best-interest test”--which, said Accadia, would have “side effects” for the financial industry.

One such effect would be the cost-centrism of the test, which, the EY partner argued, would favour the distribution of products with low or no costs rather than those that are newer or more sophisticated. This amounts to a negative impact on product offerings, he said.

ABBL adviser Marilyn Rinck, also on the webinar and who heads up the ABBL’s working group on advisory and investment, provided a market perspective. Initially, she said, it was a “relief” that the best-interest test--by replacing the current practice of quality enhancement assessment--would reduce administrative burdens. Deeper analysis confirmed the concerns Accadia suggested, however: “It will be your cheapest product variable that will be presented to the client, in addition to products without additional features,” she said.

“This will drastically hinder any new product to be developed. And, of course, [it will] reduce the investment universe of the client.”

Inducement

The EC has proposed a ban on inducement payments but only for so-called “execution-only” sales, a suggestion that has been already been flagged and criticised by the financial industry. “The market will have to adapt, of course, to compensate for the stricter rules, with potentially an evolution of tariffs, product costs or even services,” said Accadia.

“Above all,” he added, “the introduction of a review clause after three years is already an indication that a full ban on inducements could be anticipated.”

Said Rinck: “We consider it disproportionate and costly.” She reported that the market would not be in favour of changing existing requirements.

Value-for-money

Also controversial is the proposal’s value-for-money benchmark for investment products. Like the best-interest test, this aspect could have a negative impact on product offerings, according to Accadia, who said that it could favour the distribution of low/no-cost products and put pressure on actively managed investments.

“Just because you offer the lowest cost it does not necessarily mean you will get the best value for money and the retail investors’ needs and preferences will be met,” he .

“The value-for-money, [at] heart, is a good proposal, saying that the client should receive good value for [their] product,” said Rinck.

“But as it’s given in the text,” she continues, “it has no added value.” It intervenes with product pricing, she argued, and relies “massively” on uncertainties in the level-two text, since the European Securities and Markets Authority (Esma) will need to produce and put in place all the relevant benchmarks. It’s also, as Accadia observed, a cost-centric approach, “which we don’t support.”

“This is one of the main issues we have with the text, and we would like to see it removed,” she said.

Positive aspects

The EY and ABBL experts also went through several elements of the EC’s proposal that weren’t problematic, including supervisory enforcement, marketing and communication, knowledge and competence, and the criteria for being defined as a professional retail investor.

Regarding supervisory enforcement, Accadia pointed out that the directive introduces measures that strengthen investor protection by facilitating closer collaboration between authorities and making processes more efficient. “We see that as reasonable and fair,” said Rinck of this part of the proposed text.

On marketing and communication, the new requirements would help prevent misleading market practices by ensuring that risks and benefits are presented in a fair way. “We are in favour of that proposal,” added Rinck, emphasising that its improvements to accountability are “a real step forward.”

The knowledge and competence clauses don’t affect the Luxembourg sector as much, said Accadia, since MiFID II introduced similar requirements and there is already a related CSSF circular in place. “We are in favour of keeping high standards for the professional qualifications of client-facing staff,” added Rinck.

Both the qualitative and quantitative criteria for defining which retail investors are professionals have been updated. “They seem to be better adapted to sophisticated clients, to improve accessibility to more complex products,” said Accadia. Rinck agreed this this is a positive development for the Luxembourg market.