Analysis – EU Power Battle Could Hamper Proposed Safeguards for Financial Products

European Union plans to increase protections for consumers of financial services are reigniting a long-simmering power battle between national and EU regulators that could hamper how the tougher safeguards will be enforced.

The European Commission, the EU’s executive body, on Wednesday proposed stricter rules on selling financial products, such as mutual funds and insurance, to increase consumer trust in investing, and deepen the bloc’s capital market as it faces competition from Britain since Brexit.

Retail financial services are typically regulated by national rather than EU watchdogs and some market participants are predicting clashes, particularly on the transfer of greater supervisory powers to the securities and insurance watchdogs, ESMA and EIOPA.

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The plans, known as the retail investment package, propose an EU layer of “value for money” safeguards for products and tougher EU rules for financial advisors.

Firms would also have to report to the watchdogs on their cross-border services to “identify areas where supervision should focus on and where stronger cooperation may be needed,” the plans say.

“The question for me is does the retail investment strategy get bogged down into an institutional power sharing question before you even start to talk about the substance?” said Victor van Hoorn, head of the Brussels office at the Investment Company Institute, a global funds industry body.

ESMA and EIOPA would devise cost and performance benchmarks that about 30,000 mutual funds and other products would have to comply with, or be withdrawn.

ESMA, which would need an extra 11 staff to exercise its new powers, has also proposed fining asset managers who charge “undue” costs to customers.

The division of power between state and EU-level financial regulators has long been politically fraught, with countries rejecting the notion of a centralized counterpart to the powerful U.S. Securities and Exchange Commission.

The European Central Bank already regulates the biggest banks in the EU, while insurers comply with pan-EU solvency rules, leaving retail-product markets among the few areas where countries have discretion.

The finance ministers of Luxembourg, a major EU investment funds center, and Poland told the Financial Times in a letter last week that further centralisation of supervisory powers in the EU would be counterproductive to deepening the capital market.

But Better Finance, which campaigns for investors, said existing value for money rules were never properly enforced by member states, and bolstering EU-level watchdogs would help to change this.

“It is therefore vital to thoroughly improve the effectiveness and consistency of the supervision of the European investor protection rules, and to provide the EU supervisory authorities with the tools to achieve that,” the campaigner said.

EU consumer group BEUC echoed this, saying that for the proposed protections to work they would need to be enforced at the European level in a unified way.

Member states’ opposition has already led to the substance of the EU proposals being watered down before publication.

The Commission’s initial intention was to ban commission paid by banks and insurers to brokers and advisors who favor their products over potentially cheaper rivals, a step Britain and the Netherlands have already taken.

But Germany, France, Italy and Poland, along with banks and insurers, had lobbied hard against such a broad ban, arguing it would upend a widely used business model that relies on commission-based sales.

To avoid “significant and sudden impacts,” a ban is now only proposed for products where no advice is provided.

An insurance industry official said even this could end up becoming a broad ban in practice because of the tougher safeguards advisors would have to meet under the proposals, pushing customers towards advice-free products.

EU states and the European Parliament have the final say on the plans, with changes likely, including attempts to reintroduce a full ban on commission.

(Reporting by Huw Jones; editing by Sinead Cruise and Sharon Singleton)