Joint ESMA - EIOPA Webinar on cost and past performance reports

On 2nd of February, the European Securities and Markets Authority (ESMA) and the?European Insurance and Occupational Pensions Authority (EIOPA) hosted a webinar discussing their fifth report on the cost and past performance of retail-investment products, insurance-based investments products and personal pension products. In case you could not participate, we have summarized the most important aspects for you.

Key takeaways

• ESMA and EIOPA are concerned that a lack of data is hindering their ability to analyse the markets and are working to make data more readily available to regulators.
• EIOPA noted that in the future supervisory bodies could discuss the different proxies and benchmarks that are available to stakeholders.
• ESMA is working to identify potential approaches to better define the utility investors derive from undertakings for collective investment in transferable securities (UCITS), guidelines on performance fees, common supervisory action on costs, and the MiFID II guidelines on sustainability requirements.
• EIOPA found that significant heterogeneity exists across insurance-based investment products (IBIPs) and pension markets. These persist not only in terms of cost, but also in relation to taxonomy, product design and disclosures.
• ESMA and EIOPA are working to better understand the drivers of costs and benefits as well as the drivers of heterogeneity.
• Both supply and demand for ESG products have grown which poses concerns for supervisors in terms of greenwashing, information provided to consumers, and how they perceive this information.
• ESMA and EIOPA are very interested in the impact inflation has on returns received by consumers and want to ensure that both consumers and providers are conscious of its effect.

?

In detail:

• ?Introduction

Steffen Kern, Chief Economist and Head of Risk, ESMA

• Common trends across both reports include the heterogeneity of performance and costs, the development of sustainable finance and the impact of inflation on financial products.
• There has been a decline in the cost of investment funds. That decline has been observed across several iterations of ESMA’s report so it can be labeled a trend. However, this decline is slow and can also be observed in third country markets.

Timothy Shakesby, Head of Conduct of Business Oversight, EIOPA

• Large parts of the insurance, investment and savings market are exposed to the broader market and follow general trends. As such, they have seen positive results for investors.
• In relation to sustainability, EIOPA found that consumers are not paying a premium for ESG. However, it is early days in relation to ESG products, and therefore, EIOPA is wary of drawing conclusions.
• EIOPA is working to better understand the drivers of costs and benefits as well as the drivers of heterogeneity. The report explored cross-border business and found that it was more expensive than domestic business. While EIOPA is not yet ready to draw conclusions as to why, they acknowledge that this must be at least partly related to distribution costs. The drivers of distribution costs also require further investigation.
• There is a lack of transparency among products. This causes difficulty for regulators and supervisors, and is likely to be a greater problem for consumers.

?

• Presentation by ESMA

Tanya De Renzis, Consumer Sustainability and Innovation Analysis Unit, ESMA

• ESMA has observed a marginal decline in costs over time. This decline is also observed in third country markets.
• In relation to UCITS funds, active funds are more costly than passive funds and ETFs, so their net performance was on average lower in comparison.
• There has been an increased interest in sustainable products and finance. ESG funds show better performance than non-ESG funds and are cheaper.
• Costs were higher for cross-border funds than for domestic funds, mainly due to differences in distribution channels.
• Structured retail products issued in 2021 were more costly than those observed in the three years prior.

Undertakings for Collective Investment in Transferable Securities (UCITS)

• There has been a marginal decline in costs between 2012 and 2021. This trend is more evident in equity and ongoing costs.
• The largest top-25% funds are 40% cheaper than the smallest bottom-25% funds for equity and bond UCITS in 2021, however, cross-border funds they are 40% more expensive than domestic funds. ESMA intends to study the dynamics of these higher costs.
• ESMA is also interested in analysing the impact of inflation on the real rate of return consumers receive. Although it is exogenous to funds, it does still affect the payouts received by consumers.

Retail Alternative Investment Funds (AIFs)

• There is still limited retail investment in AIFs. However, ESMA does note that they cannot conduct a full cost analysis due to a lack of data. This also intersects with ESMA’s ongoing work to improve transparency.

Structured Retail Products

• This side of the market is profoundly non-transparent. For the majority of product types and issues, median costs of products in 2021 were higher compared to the 2018 to 2020 period.

Main takeaways

• High inflation and relatively low market performance raise concerns about the value of money of high-cost products for consumers. A key element of encouraging retail investors’ participation in the European capital market is the availability of well-designed and cost-efficient products.
• ESMA is working to identify potential approaches to better define the utility investors derive from UCITS, guidelines on performance fees, common supervisory action on costs, and the MiFID II guidelines on sustainability requirements.

?

• Presentation by EIOPA

Luísa Gaspar, Expert in Conduct Business Oversight, EIOPA

• The insurance and pension fund sectors have shown resilience and continue to deliver overall value for consumers.

Insurance Based Investment Products (IBIPs)

• These products follow the general market trend so overall returns were robust.
• Costs have remained stable throughout the years but cost structure and returns differ across markets, particularly for unit-linked products.
• ESG products perform better than those without ESG features. In terms of costs, they are slightly cheaper.
• Both supply and demand for ESG products have grown which poses concerns for supervisors in terms of greenwashing, information provided to consumers, and how they perceive this information.

Pensions schemes and Institutions for Occupational Retirement Provision (IORPs)

• Heterogeneity persists among different markets, therefore general conclusions are hard to draw. This difference across Member States was particularly due to the lack of an EU taxonomy.
• Personal pension products have had robust returns and costs are in line with the insurance sector. Cost level is higher for personal pension products which mimic unit-linked products but there has been a decline from 2.8% in 2017 to 1.9% in 2021.They are also more expensive than profit participation products
• Despite an increase of interest in these products, the penetration rate, in particular for IORPs, is still low. However, this varies depending on factors such as regulatory system and labour laws.

Next Steps:

• Insurance Based Investment Products (IBIPs)
• EIOPA plans to extend their work on ESG following the transposition of the SFRD.
• EIOPA aims to better understand the fundamentals of cross-border business and the reasons behind different performance indicators.
• EIOPA plans to incorporate additional refinements on costs, especially on multi-option hybrid products.
• Pension Sector
• EIOPA is to continue its work on harmonisation and will conduct more detailed country analysis.
• EIOPA is to conduct further analysis on cost drivers, along with other fundamentals, leveraging the increasing availability of data.

If you are interested to discuss any aspects in more detail, please reach out to our experts at PwC Switzerland - Legal

Dr Guenther Dobrauz-Saldapenna Dr. Jean-Claude Spillmann Gabriela Tsekova Adrien Tharin Dr. Antonios Koumbarakis Silvan Thoma