Lukas Strobl: Change is coming for the world of funds in Europe. The EU Commission has proposed a new retail investment package and there is some change both for investors and for providers in it. To explain what it is, I've got our Morningstar Manager Research Director Matias Möttölä with me.
Matias, what's the headline here?
Matias Möttölä: Yeah, Lukas, this is something that's been long time coming and hotly debated this spring. And the juiciest and the perhaps more relevant bit is around inducements, or rebates. So while the European Commission stopped short of proposing a full ban on fund rebates, it does propose that so-called execution-only or do-it-yourself investors should face lower fees going forward.
Strobl: So execution only, that's people who do their own research, know which fund they want to buy and then just go to the provider to make the transaction. I guess that includes me and a large cohort of investors, especially since the pandemic. So I guess-- am I overpaying now?
Möttölä: Well, today most Europeans can only buy so-called full-freight fee share classes and this means they are paying not just for fund management but also distribution and advice. No matter if they are getting advice or not. And so, this is an issue and has led to elevated fees for many, compared to what they are getting. Secondly, it has led to improper incentive structures, so the advisor is not charging the customer directly. So does that incentivize them to serve their clients in the best possible way? Well, we surely know that that's not always the case at all, so funds are much too often sold rather than bought. In the U.K. and Holland, regulation is already different. There they have this full rebate ban and so advisors must take their payment directly from the clients rather than as a kickback back from the distributor. And it's obviously a healthier structure with, but of course also leads to some issues with availability of advice and that's something that the Commission is certainly worried about as well.
Strobl: Well, clean share classes and consumer-centered incentive structures seem like great news, surely there are losers in all this.
Möttölä: Yeah, the fund industry surely feels that at the moment that they have somehow been saved or have had a victory as they avoided the full ban. But I do think the industry as a whole does have things to worry about here. The Commission says that although they would allow banks and insurance companies to continue to sell funds with advice fees baked in, there now must be proof that advice has been provided and it has added value. And also the Commission wants to make sure, through a new benchmark concept, that investors are not sold substandard products. So if you read between the lines, essentially what's being said is that today the industry is not serving its clients that well and there must be new controls, i.e., new regulation. So that doesn't sound too encouraging. And also in three years' time the Commission is saying they will review the results of this first round of reforms. And they may revisit the idea of a full rebate. And that means then that for industry players, they must be ready for that kind of new reality as well.
Strobl: So quite a bit of upside for investors and a lot of regulatory risk for providers, it seems. Of course, this legislation is still in the early stages, we'll see what comes out of it when it makes it through the EU's rather complex legislative process and we'll keep you up to date on what the eventual legislation looks like. For now, thank you for explaining this to us, Matias. For Morningstar, I'm Lukas Strobl.
