Europe’s co-operative banks serve 214 million customers (around half the population of the EU), who are mainly consumers, retailers, SMEs and communities. This makes them drivers of local and social growth, and major contributors to financial and economic stability by merit of their anti-cyclical behaviour. The main service provided to the retail markets by co-operative banks is the provision of credit – the biggest market share being in consumer loans and mortgage loans – but they also act as manufacturers and distributors of retail investment products. In addition, co-operative banks provide investment services and investment advice to retail clients, most notably as defined under MiFID II and PRIIPs.
Indeed, the EACB has published papers on, for example, the unintended consequences of MiFID II affecting co-operative banks and their clients. Reference is made to EACB’s November 2019 White Paper titled ‘EACB Proposal for a MiFID II Refit: “Towards a more effective framework respecting diversity and consumer choice”’. In Appendix 3 of the White Paper, various EACB members also provided relevant data to illustrate trends under MiFID II based on data from 2018 – 2019.
The above-mentioned paper is one instance which notes that the regulatory requirements for providing investment services to retail clients have significantly increased over time and continue to be expanded by regulatory practice e.g. Earlier in 2021, the ESMA consultation on MiFID II appropriateness guidelines essentially proposes to extend the organisational requirements from the suitability test (save for the suitability assessment and statement) to the non-advisory business. While the MiFID II Quick Fix package published as part of the EU COVID Recovery package contained some simplifications for professional clients and eligible counterparties, the requirements applicable to investment services for retail clients remained almost the same.
Our members remain committed to the high level of retail investor protection, but we are aware that the complexity of regulatory obligations and the generally low margins in the retail business adversely impact the offering of retail investment services, in particular advisory services or the product universe offered to retail clients, on the market. In this context, the EACB welcomes the opportunity to participate in the European Commission’s consultation on Retail Investment Strategy for Europe, but would like to emphasize that the focus of current regulatory measures should not be to increase disclosures and rules as this leads to a situation of information overload counterproductive to confident access to the EU’s capital markets by retail investors.
Retail investors would thus benefit from a review of the regulatory burden of the current investment landscape as follows:-
- Simplification and comparability: Information documents that contain helpful and concise information and that are comparable across similar products (e.g. MiFID II and PRIIPs) but not necessarily for all products across the different industries. Unlike the Single Rulebook in banking legislation, securities regulation cannot be easily interpreted in a cohesive manner across the board;
- Harmonisation of legislative dossiers: Where comparability is possible, the EU co-legislators must ensure that harmonisation across the various legislative dossiers is achieved. This is especially important in the context of the EU sustainable finance agenda currently underway. The various timeline inconsistencies between the legislative dossiers leads to disclosure gaps in ESG information being presented to retail investors – not an ideal scenario for investor protection;
- Legal certainty: Such horizontal approach should not be looked at solely in terms of regulatory drafting at Level 1 and 2, but also when it comes to co-ordination with EU supervisors. One example is the recent ESMA consultation regarding revised guidelines for the appropriateness assessment mandated under MiFID II, which had investor protection as an objective. The proposals made by ESMA overstepped what is required at Level 1 and Level 2, and thus missed the mark when they suggested increasing investor protection. It is important that legal certainty is determined at Level 1 (with some further technical criteria under Level 2) and that the ESAs do not go beyond their mandate; and
- Consumer choice and market diversity: Co-operative banks help retail clients access capital markets by providing value-added services (investment advice and portfolio management) based on their values of proximity and personal touch. It is well-known that co-operative banks are able to provide access to financing to communities that are less able to access financing. Allowing various business models to function when it comes to investment advice (which is the main value-added investment service provided by co-operative banks on a face-to-face basis), benefits clients who are less affluent but wish to invest. For example, co-operative banks have implemented various quality enhancement criteria in order to be able to satisfy MiFID II requirements, and thus this has impacted costs. The current inducements regime under MiFID II benefits such smaller/less-affluent clients who benefit from the cross-subsidisation of costs implicit in the “colllective investment (funded by inducements) model”. Therefore, a ban on inducements would be detrimental to such clients and should not be pursued.
Please refer to our position paper for further details on our answers to the consultation.