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Although binding rules are important for the markets, a poorly conceived system of pension provision can be detrimental to investors.
As Thomas Alva Edison remarked: “A good intention, with a bad approach, often leads to a poor result”. Governments all over Europe have the best intentions towards investors as far as the regulation of the financial markets is concerned. By imposing all kinds of measures on the other market participants they attempt to reduce risk of retail investors as far as possible. At the same time the intention is to promote venture capital investments and provide young companies with capital. Finally, European governments also have the best intentions for their own budgets: heavier taxation of the financial markets is supposed to bring into the public coffers billions in additional income. Attempting to reconcile so many different interests must lead to a poor result.
There is a danger that private pension schemes promoted by the state will come up against risk-averse investors, who are not likely to be willing to provide the venture capital needed for young companies. Additionally, all market participants face new taxes in the financial markets that would be detrimental to investors, traders and issuers of debt and equity alike. Political decision makers have no clear direction and do not understand that the different interests and objectives must be brought into alignment in the very same sector – the financial market.
Recent years have been dominated by various financial scandals, such as the excessive securitisation of loans and the manipulation of foreign exchange and interest rates, to name a few examples. Although these scandals were all different, they had one thing in common: they all took place in over-the-counter markets. Trading in credit derivatives took place between major international banks, as did the manipulation of the Libor interest rate and foreign exchange rates. None of the scandals of recent years was the result of a dysfunction of supervised and regulated markets.
Averting financial scandals is a worthy political objective. However, it requires knowledge of market structures and, above all; it requires governments to adopt a clear position in relation to investors. Governments do not yet appear to be aware of this necessity. Do they see themselves in the role of a protector and kind of ‘planning commission’, which keeps every supposed evil away from investors by means of product interventions and taxation aimed at influencing consumer behaviour? Or do they want to see independent, well-informed investors, who are prepared to knowingly share entrepreneurial risks? If so, the regulatory authorities should concentrate on supporting the regulated environment – though not with a tsunami of new restrictive rules, but by strengthening investors’ decision-making ability. If this is guaranteed, governments will have to accept that investors can also be allowed to have negative experiences with their investments. The idea that ‘you have to learn to cook, but cannot use the cooker because it is too dangerous’, is not viable. Negative experiences are a completely normal part of the learning process, in investment as in other areas. When you are learning to cook you are likely to get your fingers burnt at times, but eventually you will be able to take care of yourself.
The same applies to investments. Many people still do not understand how important it is to use savings from their earned income to create further sources of income. Promoting a positive attitude towards investments is also the key to countering the effects of demographic change on pension provision. It must therefore be in the interests of the political establishment to do all it can to promote the participation of as many people as possible in securities trading. We can learn from how other countries deal with this issue, for instance our Swiss neighbours. According to a study by the University of Zurich, Swiss people address financial matters more frequently and more independently. Their capital-based pension system requires much more personal responsibility, and the culture of investing in equities is significantly more developed than in many other European countries.
The redistribution of wealth concerns fundamental social issues. All the statistics show that it is better-educated and higher-income people who gain access to the attractive returns offered by the capital market. What is at stake here is nothing less than facilitating access for the vast majority of people – this is something politicians should agree on.
Although the regulatory policy of ensuring that everyone was given investment advice was based on the best of intentions, the unpopular requirement that banks keep records of any investment advice given was not conducive to promoting a positive attitude towards investing in equities. It created, and continues to create, a huge amount of bureaucracy. Keeping records of investment advice given has done nothing at all to improve the advice provided by banks, and investors and advisors soon lost interest in it. Where it is still implemented to a small degree, on the other hand, it removes all liability risks from the financial institution to the detriment of investors. The legislature must take great care to ensure that it does not trample the tender shoots of the equity investment culture with its regulatory provisions.
A European financial transactions tax will also have a negative impact on people’s private pension plans – apart from a multitude of other inconsistencies – as well as making it more difficult for young companies to raise capital. Admittedly, the problems in raising capital will only affect the private sector because, as matters stand, government bonds should be excluded from the financial transactions tax. What would be of greater urgency would be to exempt retail investors from the tax. The money they are using to provide for their retirement years has been saved from earned income on which they have already paid taxes. The call for further taxation arises from a distorted ideological viewpoint. It is ultimately not the duty of the governments in Europe to free investors from their responsibility; instead it should assume a stronger role than before in enabling investors to take on responsibility for themselves. The governments in Europe can create a transparent and fair framework, but investors themselves always have to bear responsibility for the consequences of their own actions. Those who look only at the returns instead of properly informing themselves of the risks must accept the potential losses. It takes courage to communicate that fact honestly.
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Authors: |
Rainer Riess, Director General, Federation of European Securities Exchanges (FESE) Dr Christoph Boschan, Member of the Management Board, Boerse Stuttgart AG |
