European regulator warns on quality of advice and products

Investors face a number of problems that “cannot be solved by transparency”, according to Steven Maijoor, the chairman of the European Securities & Markets Authority.

Speaking at a joint European Parliament and European Commission event on financial advice in Brussels yesterday, the European regulator’s chairman says investors face a number of issues such as lack of quality financial advice, unsuitable products and inducements.

He says: “Unsuitable investment advice is provided, for example, because the extent and the nature of information gathered about a client’s profile – on financial needs and background – varies between intermediaries.”

Maijoor says inducements to advisers, bias to a limited range of products and “prejudicial remuneration practices” are also problems.

The Esma chairman says unsuitable products are also on offer with high investment risk, “coupled with inherent complexity, opacity or insufficient information”.

He says: “This can be compounded by a lack of compliance with selling practices requirements when selling complex products.”

Maijoor adds: “We know now that too much information can confuse clients, especially unsophisticated retail clients, and can lead to them making bad choices or wrong decisions.

“I must admit here that I am trained as an economist and always have been taught that the combination of rational decision making by consumers, full transparency, and competition among suppliers solve many problems in markets.

“However, experience has now sufficiently shown that this market mechanism does not work effectively in financial markets and that regulation and supervision is needed to get the right outcomes and to protect financial consumers.”

Maijoor says the regulator will be looking at guidelines for remuneration practices and will establish a Financial Innovation Standing Committee to identify risks in financial innovation.