CALL FOR EVIDENCE * NEED FOR A * EUROPEAN COMMISSION DG MARKT

Transcription

1 CALL FOR EVIDENCE * NEED FOR A COHERENT APPROACH TO PRODUCT TRANSPARENCY AND DISTRIBUTION REQUIREMENTS FOR "SUBSTITUTE" RETAIL INVESTMENT PRODUCTS? * EUROPEAN COMMISSION DG MARKT ARCAF RESPONSE January 14, 2008 ARCAF (Association nationale des fonctionnaires épargnant pour la retraite) is a not-for-profit association that defends and promotes the interests of French public employees who invest in retirement investment (Web Site :

2 Reactions to this call for evidence should be sent to the following address: by 18 th January 2008, close of business at the latest. Requests for clarification on specific questions should be sent to the same mailbox. A feedback statement summarising the replies received will be published in March All replies will be made public via the European Commission website: except for respondents who do not want their reply to be published. In such cases, they are asked to state this clearly in their reply.

3 General Comments 1. Sometimes market share is merely gained by offering higher levels of commissions to intermediaries, not by offering real added value to investors, as retail investment are mostly sold, not bought. Currently, these asset-based commissions are not disclosed to the individual investors: - As of to-day, it remains to be seen how this disclosure will be put in place for securities and UCITs following the MiFID. - But there are no such provisions elsewhere, especially in the life insurance sector. Therefore, if the Commission wants to encourage true competition between substitute then it needs to address the competitive distortions caused by the use of commissions to influence intermediary behaviour. 2. In our opinion, the Commission must clearly put an early end to the serious inconsistencies its regulations have generated in the investment markets, as these are very detrimental to consumers: Product transparency and even more importantly distribution requirements such as the prevention of conflicts of interests by the mandatory disclosure of commissions received by the distributors must be required for all substitute investment, not restricted to securities and UCITs. Question 1: Do you see that different regulatory treatment of substitute gives rise to significant problems? Please explain why you consider this to be the case. Yes. As mentioned in the Call for Evidence document, the playing field is very uneven and inconsistent in terms of investor protection: - Especially substitute investment that are not covered either by the UCITS or by the MiFID directives do not disclose key investor information, like the total ongoing charges (e.g. unit-linked life insurance contracts in France are required to disclose only the contract s fees, not adding to them the units fees, which are usually as high or higher). - The intermediaries who sell these substitute (often the same as the ones who sell MiFID-covered investment ) do not follow any of its inducements regarding the prevention of conflicts of interests and the disclosure of their remuneration from providers if any. For example, distributors who sell life insurance have none of the MIFID obligations that would have applied if they sold directly UCITS funds or securities. - Even more important is a fact not addressed in the Commission s document: one of the main substitute investment i.e. unitlinked life insurance contracts is not only a substitute investment product to those with investor protection constraints imposed by the EU regulations, but it merely wraps the investor-protected (UCITS funds) into unprotected (in the MiFID sense) regulated by the insurance directive and local rules. Therefore, these give access

4 to MiFID-regulated without having to comply with MiFID. For example, in France, about half of the UCITS funds held by individuals are held not directly but through these wrappers, mainly for tax reasons, as rightly mentioned in the Document, but also because they often provide more remuneration for intermediaries than straight funds (the intermediaries usually get retrocessions or trailer fees on the UCITS funds asset-based commissions, but also on the wrapper contract asset-based commissions as well). Therefore, not only the EU regulations target a small portion of substitute investment, but they miss often no less than half of their already small target by not addressing the wrapper issue. Question 2: Do you regard the perceived concerns relating to different levels of product transparency and intermediary regulation as a significant threat to the further development of EU markets for retail investment? X strongly agree somewhat agree opinion somewhat disagree strongly disagree These concerns will severely undermine investors confidence over time if not addressed quickly. Question 3: Is it appropriate to regard different retail investment as substitutable - regardless of the legal form in which they are placed on the market? Which of the listed below should be considered as substitute investment? Any of the listed by the Commission below could be considered as substitute for this purpose. But the Commission seems to have a very narrow approach to substitute, and to forget a lot of other directly competing retail investment listed below in the others section. - UCITS funds X - nationally regulated retail funds X - exchange traded or listed funds X - unit-linked life insurance (especially which mortality risk level is small or nil) X

5 - retail tranches of structured notes X - some annuities; X - some bank term deposits (e.g. with embedded optionality or structured deposits) X - others (please list and describe) - not only unit-linked insurance, but also all life insurance contracts, like the very popular contrats en euros in France which can be used as a tax friendly substitute to a capital guaranteed UCITs fund for example. - all other long term savings that wrap UCITs funds with tax advantages, like Corporate Savings and Retirement Plans in France ( PEE and PERCO ), or Riester in Germany for example. - Certificates issued by banks, which are substitutes for example of index funds. - All bank term deposits or savings accounts, not only the ones with embedded optionality or structured. For example, it is quite obvious that savings accounts are direct competitors to money market UCITS funds. X What are the features/functionalities (holding period, exposure to financial/other risk, capital protection, diversification) that lead you to regard them as interchangeable? Have you encountered any legal or other definition which would encompass the range of 'substitute investment '? - Same time horizon (short term like money market UCITS funds - to long term - equity UCITS funds or equities) - Same purposes: saving for short term needs or longer term ones, especially retirement. - Same nature: financial investments - Same distribution channels: banks, brokers, other financial intermediaries Question 4: Which factors in your opinion drive the promotion and sales of particular investment? Please use the table below to rank these factors in terms of importance (very significant; significant; no opinion; insignificant) for each of the different. In addition to completing the table, we would welcome further explanation of your view as to which factors are particularly important for each product. UCITS Nonharmonised funds Unitlinked life insurance Retail structured Annuities (Structured) Term deposits Others

6 Taxation X X XX X XX X X Financial innovation X X X X X Cultural preferences X X X X Distribution models XX XX XXX XX X X X Regulatory treatment X X X Others As the document mentions, taxation is a powerful driver, and, often, as mentioned by the EC document, life insurance are tax-advantaged compared to holding UCITS funds directly. Also, distribution compensation models are mainly based on yearly retrocessions on assets held. As mentioned earlier, there are usually two layers of retrocessions for unit-linked insurance contracts.

7 Question 5: Product disclosures: Do pre-contractual product disclosures provide enough information to help investors understand the cost and possible outcomes of the proposed investment? Please use the attached tables to provide your evaluation of the adequacy of the information provided with regard to the following items for each category of investment product. Nature of information provided UCITS Nonharmonised funds Unit-linked life insurance Retail structured Annuities (Structured) term deposits Others Product features YES YES YES NO NO NO Direct costs NO/TBS NO YES NO NO NO Indirect costs (or foregone performance) NO/TBS NO NO NO NO NO NO Risks TBS NO NO NO NO NO Capital guarantee TBS NO YES NO NO NO Likely performance NO/TBS NO NO NO NO NO Conflicts of interest Compensation or fee retrocession NO/TBS NO NO NO NO NO NO/TBS NO NO NO NO NO TBS = To be seen. As the document mentions: the implementation of MiFID is ongoing and as such its harmonising effects have not yet been fully realised. In other words, we need to see how the member states will implement the MiFID inducements. Also, we need to see what will be the future Simplified Prospectus requirements (not to be out before 2009). The current CESR proposals are not all encouraging for that matter (for example: - on the comparability of information, - on the disclosure of total costs, - and on the necessary comparison of past performance with objective benchmarks (We refer to the FAIDER (ARCAF is a founding member of FAIDER) response to the CESR Open Consultation on Key Investor Information, December 2007)

8 Question 6: Conduct of business rules: Do differences in conduct of business regulation result in tangible differences in the level of care that different types of intermediary (bank, insurance broker, investment advisor/firm) offer to their clients? For which conduct of business rules (know-yourcustomer, suitability, information/risk warnings) are differences the most pronounced and most likely to result in investor detriment? UCITS Nonharmonised funds Unitlinked life insurance Retail structured Annuities (Structured) Term deposits Others Know your customer X X X X X Suitability or appropriateness X X X X X Risk warnings X X X X Examples - information X X X X X X Others Question 7: Conflicts of interest: Are there effective rules in place to ensure effective management/disclosure of conflicts of interest (and/or compensation arrangements) by the different categories of product originators and/or intermediaries for the different types of investment product? For which type of product do you see a regulatory gap in terms of the coverage of conflict of interest rules? Please explain. The only rule on conflicts of interests prevention soon to be in place is to our knowledge the MiFID inducements that apply only to securities and UCITS that are directly (not wrapped) sold to individuals, i.e. a very small portion of retail investments. We are not aware of any other rules for other or for MiFID mentioned sold indirectly within wrappers. For example, there are no such regulations for the number one retail financial investment product in France: the 1200 billion life insurance holdings of French individuals. Question 8: unfair marketing / misleading advertising: Is the risk of unfair marketing / misleading advertising more pronounced for some product types than for others? If so, why? Can you point to concrete examples of the mis-selling of the different types of investment product resulting from unfair marketing / misleading advertising?" Yes. 8

9 For example MiFID requires that contractual and non contractual investor information be not misleading and present drawbacks and risks in a balanced way compared to the advantages of the investment : It shall be accurate and in particular shall not emphasise any potential benefits of an investment service or financial instrument without also giving a fair and prominent indication of any relevant risks It shall not disguise, diminish or obscure important items, statements or warnings. (Article 27 of Directive 2006/73/EC). But again, supposing this will be properly enforced by Member States, it will apply only to a small part of retail investment. For example, there are no such requirements for life insurance. ARCAF can give a very concrete and dramatic example: a retirement savings insurance scheme has been sold to individuals in France so far, and the advertisements (non contractual information) for this product never mention the fact that it is not properly funded (i.e. the reserves of the scheme cover less than 100 % of the liabilities vis-à-vis the participants). There, not only the risks are not indicated in a fair and prominent way, they are not disclosed at all! Moreover, for that same scheme, some very technical information in fine prints is disclosed in the Subscription Form (contractual information), but this also dramatically fails another protection provision of MiFID: the information provided shall be sufficient for, and presented in a way that is likely to be understood by, the average member of the group to whom it is directed, or by whom it is likely to be received. (article 27) We can provide the Commission with full details and supporting documents on this real case if the commission so wishes. Question 9: Is a horizontal approach to product disclosures and/or to regulation of sale and distribution appropriate and proportionate to address the problems that you have identified? Can you specify how this objective of coherence between different frameworks would address the problems? What are the potential drawbacks of such an approach? With all due respect, as already explained in FIN USE s and FAIDER s responses to the EC Green Paper on retail financial services, we strongly believe it is the silo approach or product-based approach of the European Commission that is the problem. The asset management industry is also asking the EC to put an end to the uneven playing field created by inconsistent product-by-product regulations ignoring the realities of the retail investment markets. One first step for the EU would be to extend the MiFID Directive investor information and distribution requirements to all retail investment, not only to a small part of them, and as this already small part can easily be turned around as we mentioned previously with the use of wrappers. We do not see any significant drawback to end the inconsistent approach of the EC 9

10 in this area. Question 10: Can market forces solve the problems that you identified (fully/partially)? Are there examples of successful self-regulatory initiatives in respect of investment disclosures or point of sale regulations? Are there any constraints to their effectiveness and/or enforceability? Are you aware of effective national approaches to tackle the issues identified in this call for evidence? Should it be left to national authorities to determine the best approach to tackling this problem in their jurisdiction? Is there a case for EU level involvement? Please explain. Obviously, the areas of investor information transparency and of the prevention of conflicts of interests in the distribution are unfortunately not going to be solved by market forces. We are not in favour of unnecessary regulations, but these issues have always been typically areas where the States or the EU MUST regulate to provide minimum standards of protection to investors, especially, as mentioned in this document, as retail investment play and will play a more and more crucial role in funding the life of European retirees. The EU could let each member state to regulate, but our experience shows that they don t do it or very partially. For example, in France, the MiFID investor protection features remain to be applied to the major part of French individuals financial investments: life insurance. Projects are ongoing though, and ARCAF is lobbying for them. Again, in France, half if not more of UCITS are sold through insurance wrappers, escaping all of MiFID requirements. An extension of the MiFID requirements scope would push them for an evening of the playing field consistently and rather rapidly. 10