November 27, 2011
Europe’s watchdog to hunt down rogue products
By Jeremy Woolfe
Steps to improve protection for retail investors from purchasing financial products where there is “an extremely high likelihood of mis-selling and loss to the eventual investor” are now set for use by the European Securities and Markets Authority (Esma).
Among other activities, the Paris-based authority can potentially ban certain products on a pan-European basis, on the basis of the recently disclosed Mifid proposals, says Steven Maijoor, Esma chairman. This is part of its programme to protect the investor.
He describes “faulty” products that could be subject to a ban as those that are intentionally constructed to deceive. “When you actually do the calculations, and you see the transaction cost and administrative fees involved, you see there is an extremely high likelihood of a loss to the investor,” he says.
Mr Maijoor says he had seen such cases previously, when he was managing director of Autoriteit Financiële Markten, the Dutch national financial regulator. For example, he says, one firm was refused a licence because its business plan revealed that its product would result in loss to the client.
Until the creation of Esma, it has not been possible to ban rogue products on a pan-EU basis, is how Mr Maijoor sees the situation. Some member states could issue warnings, and others could not, for legal reasons.
But at last, he says, Esma has the powers to distribute warnings, and, in certain cases could encourage bans by the national regulators. Such bans could be imposed at product approval stage.
The initiative could start with a decision by Esma’s board of supervisors. This is the authority’s decision-taking body, whose members comprise the heads of the 27 national supervisors, headed by himself.
Mr Maijoor emphasises that the example of rogue products illustrates the switch by regulators from a passive to a more active role. The upgrade is from Esma’s predecessor, the Committee of European Securities Regulators (Cesr), which was restricted to giving advice.
The former dean at the School of Business and Economics at Maastricht University makes it clear that Esma fully understands the trade-off between risk and profit. “In certain cases it is perfectly reasonable to sell certain risky products to certain [professional] buyers,” he says.
Esma is one of three new European Supervisory Authorities (ESAs), the other two being the European Banking Authority (EBA), in London, and the European Insurance and Occupational Pensions Authority (EIOPA), in Frankfurt.
The objectives of the ESAs are protection of investors, policyholders and other beneficiaries. The European Commission states they are duty-bound to ensure the integrity, efficiency and orderly functioning of financial markets.
On the more specific level of retail protection, Mr Maijoor makes a point about the priority for whatever comes in a revised version of the packaged retail investment products directive (Prips), due for a Commission proposal expected in February 2012. He wants to see the same level of retail protection for all products, including mutual funds, sold by outlets including banks and insurance companies.
Mr Maijoor points out that protection in the insurance sector is not up to normal standards.
“You have all kinds of combinations of elements with insurance. If the sale falls under the insurance category, there is less protection for retail investors, even though insurance company products may be combined with elements with mutual fund characteristics,” he says.
This matter is currently under discussion in a joint committee of the three new authorities.
“We work together on consumer issues,” says Mr Maijoor. “But, when it comes to underlying legislation, that is for the European Commission, parliament and national ministers, meeting in the Council”.
Established at the same time as the three new authorities was the European Systemic Risk Board (ESRB).
The heads of the three authorities meet every two months, under the chair of Mario Draghi, the new president of the European Central Bank.
Mr Maijoor says they share information relevant to possible future macro risks to financial markets, such as the risk that lead to the 2007-08 crisis.
The staff level at Esma started at 45 in January, and is expected to reach 70 by this year’s end, says Mr Maijoor.
It could reach 120 in 2013. The long term figure could be as high as 200 because of its mandate to supervise credit rating agencies.
The phrase, “on the basis of the recently disclosed Mifid proposals”, was added after publication for clarification.
Copyright The Financial Times Limited