The Swedish Financial Supervisory Authority, Finansinspektionen (FI), has re-iterated its strong opposition to commission payments from fund providers to intermediaries, as it outlined its key consumer protection priorities in its latest annual report.
The report has also highlighted weaknesses in the country’s PPM system of fund self-selection, insurance-based products, and information provided around sustainability-focused products.
In its annual report published 11 May, the regulator says that Swedish consumers are particularly challenged by the fact that regimes such as the Premium Pension system – which entails reliance on self-selection – puts consumers in a predicament because while they may lack sufficient knowledge about how funds work, they are still required to make decisions on which funds to select – by law a proportion of salary goes to PPM.
Meanwhile, apart from the general market penetration of funds in the area of long term savings at the level of the individual, the increasing prevalence of sustainability investing coupled with the lack of any meaningful standardisation of information is making it difficult to compare financial products on this basis, the regulator added in its annual report.
The importance of access to proper information from fund providers is crucial, the regulator states; it cites its own investigations into the area of closet trackers as an example of why regulation is required to ensure funds charging fees for being actively managed are not hoodwinking consumers. For example, when it analysed the performance of some 25 Sweden equity funds over the past decade, it found that most did outperform the index, but after fees were included just four of the funds beat the index.
However, FI also warns that providing sufficient information is not enough; providers of funds also have a responsibility to ensure that products target the right set of potential investors – particularly in regards to more complex products. It warned that pending EU and Swedish legislation would continue to tighten up the regulatory environment in this regard.
Another area of ongoing concern is the fact that there are significant legacy links between advisory businesses and provider firms. The significant breadth of funds offered in the Swedish market means that consumers are dependent on good advice. But this is where consumers have been unable to penetrate hidden costs, linked to the payments that flow from providers to intermediaries.
Pending EU and Swedish legislation is intended to make it easier for consumers to understand if their advisers are receiving up front or trail commission. But FI maintains its line that the EU rules do not go far enough as they do not ban commission payments altogether. It believes that such a blanket ban is required, for example, because up-front payments can lead to incentives that work to the detriment of the end consumer. It said that there is an onus on the fund industry to now develop new models as it would prefer to see industry initiatives lead the way, rather than have to follow up and inform both industry and consumers of where there are points of conflicts of interest. The regulator is also keen to stress its views on what it terms truly independent advice. It said in its report that although the Swedish implementation of EU law should result in consumers being told at the point of receiving advice whether it was independent or not, there is still a need to strictly ensure that consumers are not misled by use of synonyms such as ‘free standing’.
Digitalisation of advice services is one area of development that could lead to more and cheaper advice being accessed, but the regulator said there were other challenges involved in this area, such as determining what type of automated advice service may be subject to authorisation requirements and which might not. Without clarity, this could lead to consumers becoming confused.
On the issue of Sweden’s Premium Pension system, FI notes that it presents a particularly challenging situation; it offers the country’s biggest fund supermarket, but users – people saving for retirement – are generally disinterested in actively engaging, and the funds they buy may be relatively expensive or do not match the risk profile of the buyer. And because PPM essentially represents an enforced savings regime, it leaves users of the platform open to abuse by provider firms that are not “serious players” in the market. FI warns that because funds authorised in other EEA countries are free to market and distribute their funds into the Swedish PPM system, its ability to control or take steps to protect Swedish consumers is limited. (InvestmentEurope has highlighted examples of this previously: http://www.investmenteurope.net/regions/swedendenmarkfinlandnorway/falcon-funds-big-ppm-changes-expected-june/ )
FI said in its report that because Swedish workers are obliged by law to contribute into PPM-based savings via funds, there was a need for particularly strong consumer protection measures, which it feels are lacking.
“FI therefore believes that the fund range in PPM should be linited, both in terms of the number of funds and the possibility to take risk. The government should implement a new enquiry tasked with analysing hos such a solution should be formulated.”
FI has also noted its ongoing concerns around the issue of investments and savings done through insurance-based products, in particular the costs around transfers. Insurance-based savings products account for a significant part of the Swedish market, and there are still problems, such as excessive costs, in the system when, for example, people seek to shift their insurance-based savings to another provider firm. Industry and regulatory standards are meant to ensure that there is a uniform approach, but the regulator said that its own research into the area shows that not all companies are applying the agreed standards to the same degree.
Noting that Sweden’s Parliament set out particular sustainability objectives in 2015, including a demand that the financial industry play its part, FI said there has been a significant increase in products looking to ESG factors in recent years.
This has also led to an increase in the volumes of information about relevant products, but there has been no agreed definition of ‘sustainable’ or ‘sustainable investments’, which makes it difficult to select products that meet the needs of the long term saver or investor. FI has been tasked by the government to develop guidance in this area, for example, on the need for any particular regulation, and is set to report further later in 2017.
Meanwhile, the Swedish fund market has forged ahead, both in terms of the number of funds that address sustainability as well as the industry’s own organisation, the Swedish Investment Fund Association, developing its own guidance for members, FI notes. As of January, this guidance was being implemented by some 50 managers and some 600 funds in the local market, FI said. It noted that there has been a trend towards negative screening – funds electing not to invest in weapons manufacturers, for example – in the Swedish equity fund sector, and that there has been a significant level of information directed at consumers/ retail investors on these measures. And yet, FI is still concerned about the degree to which consumers understand the information they are receiving because of the lack of an agreed standard definition of what may constitute ‘sustainable’ investments.
Click here to read the full report (in Swedish): kons2017