A number of EU-level initiatives show the seriousness of intent among policymakers to further develop the European retail investment fund market. If savings are primarily in short-term deposit accounts, high savings rates will do little to help millions of households as they prepare for retirement, or support growth in the wider economy. But for the investment funds market to thrive, customers must have confidence and the regulatory environment needs to be conducive to efficient delivery across a European financial services single market.
For the investment management community, the regulatory score card is quite mixed. While supportive of efforts to provide greater transparency of cost and clearer overall disclosure, the industry is particularly frustrated at the direction of travel in the Priips KID. It is clear that for European regulators, the industry score card is similarly mixed. The important contribution that fund managers can make to the EU long-term savings market is increasingly acknowledged. At the same time, a range of initiatives, from identification of ‘closet tracking’ through to costs and performance, are seeking to shine a spotlight on delivery.
A key priority for the Investment Association is a customer-focused agenda and an industry-regulatory partnership as far as possible. It is critical that trust in financial services in general, and fund management in particular, develops to a point where investment funds become a key part of European household savings. In our view, a foundation of that confidence will be meaningful transparency. We agree that there is a need for enhanced fund manager accountability on both product charges and transaction costs. But one lesson from the experience of the Priips KID is that complex engineering should never stand in the way of clear messages. In practice, this should mean “What is the charge?” is answered by a single number in the KID, with no assumptions required about holding periods or likely returns.
For an entry cost of 0.5% to turn into a reduction in yield of 0.12%, or an Ongoing Charges Figure of 0.85% to become 0.79% risks misleading customers. Similarly, transaction cost indicators should not be showing zero or negative numbers. Clarity should mean as well that “What is the performance?” can be answered in a way that provides real information about history, and meets the regulatory objective to give a forward-looking view on how investments might perform. Better Finance warned some time ago of the “extreme danger” of depriving savers of past performance. This is a strong statement with some justification.
We also believe that meaningful transparency extends to areas beyond cost. Ultimately, value is not about the lowest price, but about delivery in the context of cost. Here again, we accept that the industry can do more to communicate in clearer language how investment works and how funds deliver for customers.
The common element in all of this is twofold. First, a real focus on customer accessibility. Second, a commitment to dialogue and customer testing, so both regulators and industry can be confident that future regulatory architecture is based on solid evidence. The acute, urgent challenges of the Priips KID should be an important positive lesson for the need to get this right.
Jonathan Lipkin is director of policy, strategy and research at the Investment Association
©2018 funds europe
