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EU Retail Investment Package 

Value Assessment: A Tale of Parallel Universes 

Sheila Nicoll, Senior Public Policy Adviser at Schroders

In the financial services regulatory world many of us are getting to grips with the reality of parallel universes. Post-Brexit, as we cross the Channel, we find ourselves having conversations and discussions which are, at least initially, strikingly similar but then go off in oddly different directions.  There is, perhaps, no starker example of this than grappling with the European Commission’s Retail Investment Strategy and, especially with the proposals around the cost of investment and, more specifically, of funds.   

The similarities 

The starting point of the narrative is familiar:  policy makers in both the UK and the EU universes want individuals to invest more. The widely expressed concern is about how much excess cash is being kept in bank accounts and how it needs to be made to work harder, both to ensure better financial futures for individuals and to support economic growth.   

The familiarity continues as discussions focus on how to encourage individuals to engage more with their finances, through more financial education and literacy, and then that leads to discussions on how to nudge individuals into focusing on, and doing something about, their financial situation and how to enhance the quality of advice. The common ground remains as the focus turns to the fact that the way that firms are required to communicate with clients isn’t working.   

… and the differences  

That is when the differences start to creep in, and you need to start to be on your guard and remember which universe you are in.  We have known for some time about the differences of approach to disclosure and, more particularly, PRIIPs (that could be the subject of a whole different article) but it usually doesn’t take long for the words “costs” or “value” to start cropping up and that is when you really need to understand which side of the portal between the two universes you are on.   

As we all, of course, know, the Financial Conduct Authority led the way in focusing on value (having been pushed back from just talking about value for money) but it took a very British approach. It reached for its competition, rather than regulatory policy, powers and it laid down a number of principles (beyond pure cost), and relied on governance frameworks, insisting that it was not going to be prescriptive about how Boards should approach their value assessments.    

Any EU approach is necessarily very different. National regulators around the EU do not have competition powers and EU negotiations and legal approaches require a great deal more prescription. If you are going to get the agreement of 27 Member States, reflect the concerns of Members of the European Parliament, get consistency of implementation and satisfy the European Court of Justice, you need to write things down in some detail.     

The ticking of the EU clock 

And the Commission’s approach was heavily influenced by a view that if you just reduce the cost of investing, more people will invest. A clock was ticking as the time available to negotiate a substantial new initiative before the next European Parliament elections was becoming very short.  Commissioners and their officials were being told by a number of influential groups that banning payments between providers and distributors would reduce the cost of investing (and increase trust in the investment process) but were being told very firmly by equally strong forces that this would have a devastating impact on the entire distribution system in the EU.   

So, they had to quickly come up with other ideas. Cue a series of proposals, including (a) a requirements for advisers to recommend the most “cost efficient investment product” and at least one “without additional features that are not necessary to the achievement of the customer’s investment objectives” and (b) mandating the European Supervisory Authorities, ESMA and EIOPA, to develop cost and performance benchmarks, based on data received from regulated firms, and requiring manufacturers not to approve products that deviate from the relevant benchmark “unless they are able to establish that costs and charges are justified and proportionate.”    

This has, probably not unsurprisingly, led to accusations of over-kill; of too much focus on costs and not other aspects of value (particularly performance); of regulators becoming involved in price fixing; of encouraging clustering around the benchmark; of uncertainty as to what is actually intended; and to significant questions about the practicalities.   

“AoV light” 

There have not been many public responses to these from the EU authorities but there are suggestions that their version of value assessment is, in fact, intended to be “AoV light” – that in the UK the value of all funds needs to be assessed and justified whereas the intention in the EU is that this would only be needed for outliers and that what they really want to do is to weed out funds which just cannot realistically be expected to offer any value.      

The impact for UK boards 

So, what does this mean for the Boards of UK funds?  Will we be expected and able, (or indeed, want) to apply the same processes in the EU as in the UK, if only to a sub-set of funds?  The simple answer, at this stage, is we don’t know.  Proposals of this sort from the Commission generally take years to negotiate and even when agreed have reasonably long lead in times, and the European elections and appointment of a new Commission next year will add further delays.  

In the UK, HM Treasury is undertaking a review of the Off-Shore Funds regime and the market is moving as we speak because UK distributors are already asking questions of EU funds as to whether they have undertaken some kind of assessment of value. There are also suggestions of some national authorities in the EU possibly “front running” the EU proposals with their own version.   

That is, therefore, not to say that fund boards should be sitting back and not engaging with the EU proposals. The long EU lead time and negotiation process mean that there are plenty of opportunities to help shape the EU rules, especially by sharing UK experiences and lessons learnt.   And there may be opportunities for the UK to learn from the EU.   

The worst outcome would be incompatible processes, onerous reporting requirements and over prescriptive rules. Firms that operate in the UK and in the EU have an interest in ensuring that universes stay reasonably parallel and that the portal between them is not too difficult to pass through. So, we do need to keep a close eye on what is going on on the other side.