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 Martin Klein
Vice-Chairman of FECIF and Chairman of VOTUM
Let’s work on standards instead of regulation
The European financial services industry rightly complains about the ever-increasing pace of regulation. The EU Commission reinforces the impression that regulation is being pursued as an end in itself for the continued employment of civil servants and not for the benefit of consumers and companies.
The regulatory appetite of the Commission with its 33,000 civil servants is particularly evident in the rampant practice of supplementing existing directives, such as MiFID II or the IDD, with a large number of black box authorisations that empower the EU Commission to issue Level 2 regulations to an indeterminate extent.
Against this backdrop, the initiative to develop European standards for financial services is met with understandable mistrust. "We already have so many rules, why should we add more on top now?" This is how many people react when I tell them about the establishment of the new Technical Committee 475 Finance at the European Committee for Standardisation CEN.
Yes, we already have many rules, but these are often the wrong ones, which achieve the opposite of what was intended. For example, excessive information requirements have led to sales prospectuses for financial services products being hundreds of pages long, but the retail investor is unable to recognise the essentials. Advisors are supposed to determine the investor's sustainability preference and explain the Taxonomy Regulation and the Disclosure Regulation in the process.
Such laws discourage investors and the result is a capital market participation rate among Europeans that is just a third of the participation rate of the US population. Staying out of the financial market actually leads to a risk of poverty for many savers.
An overly cautious investment mentality that overestimates the risks of long savings processes on the capital market leads to painful losses of income in the important goal of building up supplementary private pension provision.
The next regulatory initiative is currently being pursued in Europe with the Retail Investment Strategy, which aims to strengthen investor confidence in the capital market and the investment advice offered. Both the EU Commission and the Parliament have yet to prove that this can be achieved through this new bureaucratic push.
Do we ourselves share responsibility for the fact that the current situation is so unpleasant?
Unfortunately, yes! We have left the regulation of advisory processes and product information to the technocrats and officials of the EU Commission. None of these officials has ever held an advisory meeting with an investor. Many of them have no affinity with investments themselves and are rather dismissive and sceptical about them.
Other branches of industry have proceeded more intelligently. In particular, they have independently developed technical quality standards in recognised standardisation procedures with the joint consensus of market participants. Voluntary but often comprehensive implementation of these standards has made statutory regulation unnecessary, or the industry standard has become the legal basis. The rule is: whoever makes the standard has the market. China in particular is therefore using its pioneering role in standardisation to open up markets for itself.
It is well known that recognised standards are an excellent tool for increasing consumer confidence in products and services. Standards make products and services comparable. They define quality benchmarks and help in the search for customised offers. In this way, standards contribute to greater reliability, safety and quality. They help companies to operate across borders in the European internal market and internationally and to open up new sales markets. Joint Standards ensure the removal of trade barriers, support the opening of markets and thus increase the competitiveness of the economy.
At the same time, the standardisation of services is a suitable instrument for expanding the European internal market. In hardly any other service sector is trust in the performance of providers as necessary as in the financial services sector. Anyone planning to build up assets for their retirement provision, for example, must be able to rely on the fact that decisions they make now, but which will only have an impact in 30 years' time or later, are made on the right basis from the outset and can be monitored on an ongoing basis. It is therefore surprising that no European standards have yet been developed for the area of financial services at the interface to the investor.
The establishment of CEN TC 475 Finance is intended to be a first step in this direction of self-determined self-regulation. The aim is to develop standards that are actually suitable for strengthening investor confidence in capital market investments. We want to lead the way with market-driven solutions instead of chasing after bad laws. If we can prove to politicians that we are on the right path ourselves, we will not have to constantly fear the next regulatory attack, but will finally get ahead of the wave.
Our first goal is to develop a standard for the collection and comparison of useful customer data. The collection of data must serve the customer. Today, it is too often only used to exclude liability risks for advisors by means of predefined answer categories.
Legislation requires that an investment or insurance policy recommended by an adviser must be "suitable" and meet the wishes and needs of the customer. In order to assess this, every advisor needs a reliable and complete data basis. This is comparable to the blood count taken by a doctor. Only when he knows what blood values his patient has can he recognise problematic deviations and recommend a suitable therapy.
n Germany, we have already had very good experience with the "DIN Standard 77230 Basic Financial Analysis for Private Households". Advisors who use this standard can demonstrate to their clients that their recommendations correspond to an objectively recognised analysis and are not burdened with conflicts of interest. The personal business volume of advisors using this standard has increased. We want to raise this standard to a European basis in CEN/TC 475.
Those who wish to participate should contact their national standardisation bodies now. The first working group will have its first meeting on 18 September 2024. I would be delighted to see broad participation from our industry in Europe.
The author is Chairman of CEN/TC 475 Finance at CEN,
Vice-Chairman of FECIF and Chairman of VOTUM
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