Issue 2 • summer 2014
WMA JOURNAL Working for the Investment Community & their Clients
POLICY STATEMENT
The WMA EU Policy Statement 2014-2019 WMA’s position on EU retail financial services policy and legislation for the next legislative mandate promotes retail and wholesale differentiation, consumer protection and addressing retail consumer issues.
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MA believes that EU retail financial services policy and legislation in the next legislative mandate should: 1. Differentiate clearly between retail and wholesale markets; 2. Promote high standards and principles of consumer protection across the EU; and 3. Recognise the unique role of each member state in addressing retail consumer issues. The European Commission’s Financial Services Action Plan (FSAP) of 1999 (unchanged since) set out the key objectives for the EU internal market in financial services: • To create a single EU wholesale market; • To achieve open and secure retail markets; and • To create state-of-the-art prudential rules and structures of supervision. This formalised the creation of a single market and rule book for wholesale financial services. It also recognised that retail financial services are predominantly local, confined within national boundaries, and not susceptible to such an approach. Legislation since then has not followed this dual guideline. The European Commission and Parliament have not differentiated between wholesale and retail financial markets, but legislated on the basis of a single internal market for both. www.thewma.co.uk
The WMA now calls on European institutions to: Differentiate between wholesale and retail financial markets when legislating.
1 2
Employ Directives not Regulations in the production of retail financial services law, thus allowing a role for national Parliaments and bringing the control of consumer protection closer to the people and markets which they serve.
3
Conduct a comprehensive review of retail consumer protection in EU financial services and set a framework of Common Principles or ethics based on best practice.
4 5
Complete a cumulative impact assessment of the financial legislation enacted during the 2009-2014 Parliament and ensure all Member States appropriately implement it, rather than making new proposals to cover for poor implementation. Renew their commitment to the Financial Services Action Plan by launching a revised such Plan that respects different national characteristics of retail markets and promotes high standards of consumer protection in financial services across the EU.
Differentiate between wholesale and retail financial markets when legislating Retail and wholesale financial markets differ and require a different regulatory approach at EU level. Retail markets are predominantly local and vary in their structure along national boundaries. Consumers tend to purchase retail financial services from local advisers and may establish long-standing and trusted relationships with them. One result of such strong local ties is that companies find it difficult to develop large numbers of retail customers in other countries. Instead they tend to establish branches and then focus on building local markets and competing with domestic companies on a local basis. In the EU the national framing of retail financial markets means that they vary by member state in size, structure and common practices. Consumers buy financial products depending on the member state in which they are based. These will be different in kind and source from products in other member states. Wholesale markets, by contrast, are defined by their international nature. The absence of a significant cross-border element in retail financial services raises a question about whether a single EU market in such services is achievable or desirable. We strongly believe, on the basis of considerable experience, that the retail financial services sector is best handled by national regulators familiar with the domestic context. But we acknowledge that the quality of service provided to the consumer WMA JOURNAL 23
POLICY STATEMENT
can always be improved across the EU as a whole. The WMA strongly believes that EU legislation and regulation which seeks to harmonise a single market for all financial services should recognise and allow for differences between wholesale and retail financial markets, and between investment cultures in different member states.
Employ Directives not Regulations in the production of retail financial services law, thus allowing a role for national Parliaments and bringing the control of consumer protection closer to the people and markets which they serve In the UK and Ireland, firms offering retail financial services range from the wealth management arms of investment banks through to small retail brokers employing under five staff; and offering a variety of bespoke services from full discretionary management through advice to executiononly dealing. Almost all of these firms do not manufacture financial products and survey the wider market for appropriate investments. This market structure is very different from the bancassurance model prevalent in continental Europe. European authorities need to recognise these differences when proposing EU-wide legislation and not impose one-sizefits-all solutions that cannot embrace the divergence of business models across the EU. This suggests that Directives are more suited than Regulations to implementing EU retail market legislation. Their requirement for EU legislation to be brought into effect in member states by national Parliaments with local regulatory input tends to ensure that interpretations are in line with domestic market practice and consumer knowledge. The resulting rules make sense to market participants and carry local credibility. This is unlike Regulations, which may direct local supervisors in ways that conflict with, or in language that is not commensurate with, local rules. This leaves supervisors and firms uncertain about what they are supposed to comply with. 24 WMA JOURNAL
POLICY STATEMENT
The national focus of retail markets also makes the process of implementing Regulations less meaningful. The rules giving effect to them are written for the whole EU by the relevant European Supervisory Authority (ESA), and are implemented by national supervisors under ESA oversight. National implementing rules are not written. So there is no concession to local variations of the kind described in this paper. The outcome can be a difficult mismatch between what is required on the ground and what has been brought into being higher up. This magnifies the distance of the regulatory authority from the retail markets being supervised, increases a sense of disconnection, and reduces regulatory accountability and transparency. We believe the retail system should be rebalanced towards the national level, using EU legislation only on points of principle as a framework for local legislation and regulation. Supervisors should remain close to the retail markets they supervise and should be in a position to make the rules for them and the consumers that they serve. The WMA proposes that the European Commission use Directives for retail markets legislation, rather than Regulations; define rigorous and harmonised EU-wide principles for consumer protection for these markets; and allow for differences in market form and investment culture in and between Member States.
Conduct a comprehensive review of retail consumer protection in EU financial services and set a framework of Common Principles or ethics based on best practice Retail market practices continue to differ widely throughout the EU in spite of a large and increasing volume of pan-EU legislation. This shows the strength of their inherently local and heterogeneous nature. Consumers continue to show very little appetite to purchase products or seek advice across borders, despite encouragement to the contrary. So as argued above, retail market structures and practices should be
regulated at the national level. But there are nevertheless common principles which apply everywhere to consumer protection. These should be elaborated into an EU code of practice which would provide on an EU-wide basis the ethical content so necessary to appropriate behaviour by authorised firms and individuals in the retail space. A well-drafted code of this kind could help to eliminate, throughout the EU, unethical practices such as cold calling with their attendant high risks of consumer detriment. The WMA believes that the European Commission and Parliament can add value by conducting a comprehensive study of consumer protection standards relating specifically to the sale and purchase of financial products across Europe with a view to establishing an EU-wide set of Common Principles or ethical code of best practice.
Complete a cumulative impact assessment of the financial legislation implemented during the 2009-2014 Parliament and ensure all Member States appropriately implement it, rather than making new proposals to cover for poor implementation The past five years has seen a high volume of new legislation that has fundamentally altered the retail financial services landscape. For example, EMIR has altered the OTC derivative markets and the role of clearing houses, CRD IV/CRR have upgraded and changed the prudential position of banks and investment firms and affected their remuneration policies and regulatory reporting, MiFID will affect market structures and increase consumer protection by requiring advisers to limit and disclose potential conflicts of interest, PRIIPs will improve and standardise the quality of information provided to consumers purchasing packaged retail investment products, MAD/MAR has extended and altered the anti-market abuse landscape for many member states, and other legislature such as the AIFMD and UCITS V will increase transparency and consumer protection for investors in alternative funds and UCITS. www.thewma.co.uk
These are important, sizeable and overlapping reforms whose true market impact will not be known until they are fully implemented across all Member States. This will take some years, particularly since part of their overall effect will lie in the interactions between them. We will only know what this is, and where further work may be necessary to augment, revise or reduce the level and type of regulation achieved, by careful monitoring over a period of time. The WMA strongly recommends that the Commission assess the effect on the retail financial services market of the relevant legislation enacted in 2009-2014. This should cover the economic and market impact, the state of implementation in each Member State and how legislative interaction works out. The outcome should provide a basis for future policy and legislation.
Renew their commitment to the Financial Services Action Plan by launching a revised such Plan that respects different national characteristics of retail markets and promotes high standards of consumer protection in financial services across the EU Given the significant changes to EU financial services architecture, markets, practices and products across all sectors since the European Commission (EC) introduced the first Financial Services Action Plan (FSAP) in 1999, the WMA believes that the new mandate period from 2014- 2019 provides the opportunity for EU authorities, notably the EC, to revisit the FSAP and launch a renewed and revised version: FSAP II. This would symbolise the renewed commitment of the authorities to the integrity and success of the EU financial services sector with its attendant benefits of economic growth, employment, EU competitiveness in global markets, and contribution to the EU tax base. The retail financial services chapter should prioritise: • Differentiation from EU wholesale markets; • Promotion of high standards of consumer protection in EU financial services; and www.thewma.co.uk
• Respect for the different national characteristics of EU member states; It might also feature the education of EU consumers as a key long term priority, beyond the 5-year mandate just beginning, to assist them to take informed decisions on managing their general finances, savings, and investments. The WMA strongly recommends that these objectives be met through legislative and non-legislative actions by relevant EU authorities in the coming mandate period.
Summary of recommendations
• Differentiate between wholesale and retail financial markets when legislating. • Employ Directives not Regulations in the production of retail financial services law, thus allowing a role for national Parliaments and bringing the control of consumer protection closer to the people and markets which they serve. • Conduct a comprehensive review of retail consumer protection in EU financial services and set a framework of Common Principles or ethics based on best practice. • Complete a cumulative impact assessment of the financial legislation enacted during the 2009-2014 Parliament and ensure all Member States appropriately implement it, rather than making new proposals to cover for poor implementation. • Renew their commitment to the Financial Services Action Plan by launching a revised such Plan that respects different national characteristics of retail markets and promotes high standards of consumer protection in financial services across the EU.
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