Guillaume Prache, managing director of the European Federation of Financial Services Users, tells IndexUniverse.eu editor Paul Amery why he’s worried about the current direction of European financial services regulation

IndexUniverse.eu: Guillaume, one of the priorities of your organisation is achieving “fair, clear and comparable information” for Europe’s consumers. How far are we from reaching that goal?

Prache: It’s worth pointing out that this objective is part of European law. The 2007 Markets in Financial Instruments Directive (“MiFID”) requires that information on financial products should be “clear, fair and not misleading”.

Unfortunately, we feel that this regulation hasn’t been sufficiently implemented by the financial industry. Nor have national regulators enforced it adequately.

I also serve as chairman of the stakeholder group of the European Securities and Markets Authority (ESMA). Investor protection is one of ESMA’s statutory objectives and the regulator’s peer review group has said that harmonising supervisory practice between EU member states is one of its key tasks for this year.

IU.eu: Could you give an example of where consumers currently suffer from misleading information?

Prache: Yes, I can give you one from the area of index-tracking funds. In fact, we highlighted this specific case to regulators, not least because index trackers are supposed to be relatively simple investment products.

We found an exchange-traded fund tracking the CAC 40 index that cost 25 basis points a year in fees. Meanwhile a retail fund tracking the same index was being sold for 295 basis points a year. And these funds were being run by the same asset manager!

But the expensive fund was being sold by a commercial bank, while to buy the ETF you had to go to an online broker.

An investor paying 2.95% a year for a CAC 40 index tracker would lose 25% of his savings within eight years, by comparison with the ETF. We’ve argued that retail investors cannot be receiving fair and clear information if they are being offered the more expensive fund while not being informed about the much cheaper alternative.

And as far as the more expensive index fund is concerned, I couldn’t find any information on the inducements being offered to the intermediaries involved in the sale, even though MiFID requires full pre-sale disclosure of such commissions.

So this is an example of the investor protection provisions of MiFID not being enforced by national regulators.

IU.eu: Your organisation has also called for the elimination of tax discrimination against EU individual savers and investors. What are the key areas of concern here?

Prache: They relate primarily to the double taxation of equity dividends. For example, a Belgian individual investor in French shares can end up getting taxed twice, once at source in France, at a rate of 15%, and then again at 25% in Belgium on the remaining dividend income.

Domestic shareholders of a Belgian entity may end up being foreign shareholders of a French company by way of cross-border mergers, and suddenly find that their dividends are being taxed at a much higher rate.

We believe that such arrangements contradict the Rome Treaty on the free flow of capital within the EU.

There are some signs of progress in ending cases of discriminatory tax treatment. For example, the European Court of Justice has recently disallowed the French government from imposing a 30% withholding tax on distributions from investment funds that are not domiciled locally. However, this still hasn’t filtered down to the individual investor.

The European Commission has said that ending discriminatory tax treatment of investors in Europe is a major issue that needs to be addressed, but that’s still only a long-term objective.

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