FECIF - The European Federation of Financial Advisers and Financial Intermediaries

Editorial - November 2023

Martn KleinMartin Klein
FEICIF Deputy Chairman, VOTUM Chairman

European politicians must see cutting red tape as a core task

Harmful new regulation must be prevented - the Retail Investment Strategy is a warning sign for this!

The unchecked increase in bureaucratic burdens is weakening the European economy's ability to grow. Increasingly burdensome and detailed regulatory provisions are penetrating like sand into the gears of functioning economic sectors. Unnecessary bureaucracy is not just a nuisance. It hinders the profitability of businesses and prevents innovation. It discourages young people from starting up or taking over businesses.

There is now hardly a market segment in which business owners do not have to seek legal advice in order to comply with all the existing formal requirements, reporting, information, clarification and record-keeping obligations. The financial outlay for this amounts to a double-digit percentage of sales. For small and medium-sized companies in particular, the ever-expanding bureaucratic quagmire often means the end of the road.

In the European member states, there are more and more politicians who have more or less credibly taken up the cause of reducing bureaucracy. In most cases, however, their efforts end with the remark that their hands are tied because Europe is the responsible driver for more and more regulation.

This is indeed true for the increase in bureaucracy in recent years. It can be observed that the EU Commission is using the tool of authorizations to give itself the legitimacy not only to make EU directives more and more detailed. By means of European regulations, which are directly applicable without the participation of the national parliaments in the respective nation states, the framework of laws for every economic sector is prescribed in such an atomistic manner that the nation states no longer have any room for maneuver.

A current example of this unchecked regulatory frenzy of the EU Commission is its draft Retail Investment Strategy. Based on the correct observation that European retail investors do not participate to a sufficient extent in the capital market and its associated earnings opportunities, the EU Commission is once again resorting to the only panacea it seems to know: it is calling for more regulation, not only of capital market products, but also of investment advice.  

The Commission's proposal reads in large parts like the wet dream of a manic bureaucrat.
Example pleasing:

The EU Commission wants to be authorized to develop so-called product benchmarks for investment and insurance investment products together with ESMA and EIOPA. It wants to issue guidelines for these benchmarks and monitor compliance with them. One can literally see how the heads of the authorities are rubbing their hands with glee at the thought of the increase in power they will receive and with how many more employees and new departments they will be able to enhance their offices and their importance. The fact that we are moving further and further away from the ideals of a social market economy as a result of this kind of state product specification and control is obviously being accepted with approval.

Investment advice is also being overburdened with further obligations. Although the process of checking suitability was only recently supplemented by the mandatory determination of the investor's sustainability preferences, which leads to an extension of the advisory process by up to one hour, a further obligation is now to be added to every advisory service, the extent of which cannot yet be fully assessed: in future, for every recommendation of an investment or insurance product, the customer is to be presented with an alternative product proposal, which is more cost-effective but has fewer performance features than the original investment proposal.

The madness hidden in this requirement can only be understood by investment advisors who are practically active. Those who dream up such regulations at their desks in the Commission have obviously never conducted a consultation.

Today, in order to recommend an investment product to a customer, a declaration of suitability must already be provided, explaining to the customer how the selection of the investment product took into account his or her financial circumstances, risk tolerance, investment objectives and desired investment duration, as well as sustainability preferences.

If an alternative investment product is now always to be proposed to the customer as well, a second suitability statement must explain to them how these customer needs are taken into account in this investment product.

In addition, the product information documents must be handed over for both products so that the customer can make a fully informed choice between the two proposals. In addition, it must be explained to them where the performance differs between the two products.

One can imagine not only the customer being completely overwhelmed with such a flood of information, but also the uncertainty of such a customer who, after all, has turned to an advisor to receive a clear recommendation and not two alternatives!

This legislative delusion, by the way, comes from an EU commission that has found that customer information on investment products is confusing and that also states that the financial literacy of retail investors in Europe is poor. If one accepts these premises as true, the path taken by the Commission proves to be a labyrinth for any objective observer.

It becomes intentionally consumer-damaging when small investors are referred to the possibility of online brokerage offers, with the indication that these would supposedly be less expensive. For a small investor with little financial education, an on-line switching, with which has no advisory service, because it addresses itself exclusively to self-decision making, is straight away, the wrong way. An insufficiently educated investor can never decide whether to take too little risk and thus lose opportunities for returns, or to take too much risk and thus put their economic existence and security at risk.

The Retail Investment Strategy is thus another example of how regulation is falsely justified with consumer protection interests, but achieves the opposite.

Not only the current European parliamentarians, but also the politicians in the European member states are called upon to prevent this prime example of senseless over-bureaucratization. The EU Commission has initiated a round table in which representatives of banking associations, advisor associations, such as fecif, insurance associations and consumer protection associations are to initiate their own deliberations on improving the product range and customer-oriented advice, with the request that the existing regulations be disregarded in the process. We will be watching to see how seriously the EU Commission takes this initiative for better regulation.

The goal here must also be a significant reduction in bureaucracy, which politicians in every country must advocate not only at the national level, but also at the European level.
A European politician who does not credibly demonstrate their commitment to bureaucratic overkill cannot be elected by a citizen who wants the EU to remain a successful model. This must be taken into account in the upcoming elections in spring 2024.

The almost 2000-year-old wisdom of Tacitus applies: “Corruptissima re publica plurimae leges" - "The more corrupt the state, the more numerous the laws”.

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