Union Investment urges review of government regulation objectives

Germany’s Union Investment has called for a review of the “flood” of fund regulation of local investment products, charging that the government is losing sight of the bigger picture and “meaningful” measures.

A statement from the firm, one of the biggest product providers locally and across Europe, said investment funds are among the most strictly regulated financial products in Germany, but the flood of laws introduced since the financial crisis “shows no sign of subsiding”.

“We support all proposed regulation that is meaningful and improves circumstances for our customers,” said Hans Joachim Reinke (pictured), Chief Executive Officer of Union Investment.

“But we are bewildered by the fact that governments are losing sight of objectives, such as investor protection and the stabilisation of the financial system, that they have set themselves, and are now tarring all financial services with the same brush.”

He said Union Investment would like to see more clarity about planned regulatory measures, a better sense of proportion in the debate and, “above all, a coordinated approach so that the 30 or more pieces of regulation currently proposed for the industry do not contradict each other”.

It was important “perverse outcomes” arising from this tidal wave of proposed regulation to are highlighted at an early stage “on behalf of customers”, so that lawmakers are forced to make changes where they are needed.

“As an asset manager, we will face more demands than ever in our role as responsible trustee in the future,” added Reinke.

Action is urgently needed in three areas: firstly, in the planned new regulations regarding open-ended real estate funds, where there was a lack of coordination between measures, secondly in the case of the financial transaction tax (FTT), and thirdly in the debate about fee-based financial advice.

New regulations have applied to open-ended real estate funds in Germany since 1 January 2013 as a result of the Investor Protection and Functionality Improvement Act (AnsFuG).

They include thresholds and therefore redemption of €30,000 per investor, per fund and per half calendar year, as well as a minimum holding period of 24 months and a notice period of 12 months.

“This means that the AnsFuG will improve open-ended real estate funds and will enshrine in regulation what we had already implemented voluntarily several years ago in terms of our liquidity management and the rigorous separation of retail and institutional funds,” explained Reinke.

Now, however, the debate about whether these measures were sufficient was being reopened. “And we have a clearly different view to that of the German finance ministry,” stressed the CEO.

The provisions of the AnsFuG would have had a stabilising effect on open-ended real estate funds, but this would be completely counteracted by the current draft of the Capital Investment Code (KAGB).

The draft intends to restrict access options for retail investors to such an extent that they would only be able to sell units in an open-ended real estate fund once a year or buy them four times a year, without any threshold.

Following the implementation of these regulations, open-ended real estate funds would no longer be attractive to new investors. The consequence would be a gradual withering of this asset class.

“As a result, we are asking that no differentiation shall be made between existing investors and new investors, in fact we want AnsFuG for everybody!” stressed Reinke. “Beyond that, no further regulation is needed for open-ended real estate funds.”

Regarding the planned introduction of a financial transaction tax in 11 of the 27 EU countries, Reinke said: “The financial transaction tax is aimed at the wrong target; it will hit small savers rather than those responsible for the crisis. It is simply an additional levy for people who already have to pay enough tax for the woes of the euro-zone debt crisis.”

The initiator itself, the European Commission, computed a reduction of 8% in maturity value based on the example of a Dutch pension fund. “The theory that the financial transaction tax would force banks to share in the cost of the crisis, which some politicians bring up time after time, is a fallacy that too many people are still believing,” charged Reinke.

He said that in the interest of customers, Union Investment wants the German government to keep the promise it made when negotiating the fiscal package. “The government promised that small savers and those saving for old-age pensions would be exempt from the financial transaction tax, but so far we have yet to see any evidence of this,” he said.

As a result of the discussion surrounding the second Markets in Financial Instruments Directive (MiFID II), commission-based financial advice has almost been banned in Germany.

Although German politicians initially argued against the changes, debate continues at both the German and European levels. “For the avoidance of misunderstanding: we are not fundamentally against fee-based advice and we do not want to engage in a debate about which model is better. Instead we are in favour of both models existing in parallel,” explained Reinke.

Nobody knows which form of advice is better; there is no scientific evidence. “Ultimately, the quality of advice decides the outcome, not the adviser’s remuneration. The cooperative financial network is well positioned in terms of advisory quality and enjoys enormous confidence among its customers because its banks have strong regional ties,” he added.

The firm is querying whether fee-based advice makes sense at all, and if so, for whom? Fee-based advice alone would make it difficult for many smaller investors to access professional advice, because it costs an average of €128 an hour in Germany.

As a result, these customers would not receive advice, and would be largely excluded from the capital markets. In the UK, where this regulation has been introduced, these trends could already be seen.

Large sections of the population have abandoned financial advice because they can’t afford it or do not want to pay for it. This effect could also occur in Germany, with all the repercussions that would have for the economy.

“Following the wealth gap, an advice gap would open up, so our position is clear: compulsory fee-based advice as the only option is socially unjust and contradicts our cooperative values,” Reinke’s concluded.

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