SERVING CONSUMERS

RETAIL INVESTMENT: STAKEHOLDER DIALOGUE

Charting the course

Unlocking retail participation in EU capital markets

On 18 July 2023, the European Commission organised a roundtable on the ‘Distribution of Retail Investment Products’ with the financial and insurance industry and consumer organisations to discuss the future of EU capital markets. During the roundtable, the European Commissioner for Financial Stability, Financial Services and Capital Markets Union, Mairead McGuinness, stressed the need for decisive action to foster retail participation in capital markets and insisted on the importance of an ‘industry-led initiative’.

Fostering a more attractive environment for retail investors

Industry and consumer representatives were therefore encouraged to reflect together on how to foster a more attractive environment for retail investors, under the coordination of a secretariat composed of the European Banking Federation (EBF), the European Fund and Asset Management Association (EFAMA), and Insurance Europe.

EBF, EFAMA, and Insurance Europe consulted the EU Federations invited by the European Commission, and based on the inputs received, drafted a discussion paper presented at the second European Commission roundtable on 11 April.

The discussion paper aims to contribute to the general discussion on retail investor participation in the EU and how to improve it. The paper proposes a number of recommendations to EU legislators and member states to enhance the current regulatory landscape and offers insights based on industry experience.

Increasing retail investor participation in capital markets

Investment and insurance products can help consumers’ financial well-being and direct capital towards the EU economy. Besides, insurers can offer risk cover against unforeseen events and the peace of mind of minimum guarantees , which are decisive elements in convincing risk-averse consumers to invest. To play these roles, financial and insurance institutions need a regulatory framework that is fit for purpose and conducive to innovation.

Source: “Disclosures, suitability and inducements”, Kantar study, 2022

“Investment and insurance products can help consumers’ financial well-being and direct capital towards the EU economy.”

Smart and simple regulatory framework

Future EU regulatory action should consider prioritising the reduction of regulatory red tape where appropriate. The continuous influx of financial market legislation since 2008 has posed significant challenges and costs, particularly for smaller market players, who must navigate numerous adjustments to comply with the regulatory framework.

It should be recognised that the distribution of retail investment products is already subject to robust regulatory requirements, including the Insurance Distribution Directive (IDD) and the Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs) for the insurance sector.

For operators, every change in the rules comes with high cost and needs time to be processed. For consumers, too frequent changes to the regulatory framework could be confusing, leading to further hesitation or a search for less regulated alternatives. This tendency might be reinforced, seeing that increased regulatory costs, for example, also have an impact on product pricing.

The next EU legislative cycle represents an opportunity to re-think key questions of regulation to ensure the framework is fit for purpose. While over regulation is seen as increasing complexity for both firms and investors, EU policy action should consider the targeted reduction of regulatory red tape to support the simplification of the investor journey.

It should also consider measures to stimulate an investor-friendly environment, by promoting, inter alia, less bureaucracy, improved disclosures, and better consumer testing. Consumers should also have easy access to investment and advice, and to a variety of products and providers.

Financial education also plays a pivotal role in empowering consumers to make informed investment decisions.

How can authorities foster financial education?

• Conduct a “financial health check” at key points in life to nudge people into considering their financial wellbeing when talking to an advisor, an intermediary or other financial professional.
• Use public awareness campaigns to raise awareness of the importance of investing and preparing for the future.
• Develop educational materials (e.g. videos for social media, slides, games, infographics, one-pagers, etc.) that can be used by teachers, trainers, local authorities and consumers at key stages of their life.
• Include financial and insurance literacy in national school curricula.

Other venues to be explored

The discussion paper also incorporates reflections on structural aspects, recommending member states to develop a robust multi-pillar pension system and harnessing the pivotal role of tax treatment of long-term investments to incentivise participation.

Special attention is also dedicated to the possibility to use digital solutions, for example to provide more engaging information to consumers. The discussion paper stresses that regulation needs to be technology-neutral, innovation-friendly and be complemented by effective initiatives on digital literacy.

Looking ahead

The insurance industry remains committed to continue the dialogue on how to empower consumers to invest with confidence and prepare for old age.