The magic number is 10 trillion euros. According to estimates from the European Commission, EU citizens hold this enormous sum as bank deposits. While these deposits are safe and easily accessible, they generally yield lower returns over the long term compared to investments in the financial markets. Moreover, given the enormous financing needs for infrastructure, innovation, and transformation, it would be desirable if more savers converted into investors, putting parts of their wealth into stocks and bonds, instead of letting it lie dormant in savings accounts.

So far, so agreeable. Hardly any political force or institution would refuse the call to encourage more Europeans to engage in private investments. However, opinions differ on what exactly the EU and national governments can and should do to mobilise more savers.

Broadly speaking, some swear by the idea that retail investors will only gain confidence in capital market engagement if they feel protected by a robust regulatory framework that excludes any conflicts of interest, and clearly demonstrates through comprehensive documentation and transparency that retail investors are not disadvantaged. Others believe the legal framework should be limited to the essentials – primarily to make access to capital investments as simple and attractive as possible for retail investors. That is based on the conviction that households best understand the profitability of investing part of their wealth in capital markets when they actively experience their assets growing – so-called „learning by earning.“

These diverging approaches explain why the EU is currently struggling with a legislative process that, at first glance, does not seem so controversial: the Retail Investment Strategy (RIS), i.e., EU rules for private individuals’ capital investments. In 2023, the European Commission proposed a draft law. It includes requirements for financial product providers, such as rules ensuring an appropriate value-for-money ratio, partly through benchmarking with similar products and increased cost transparency. Measures to improve financial literacy are also planned.

The two EU legislators – the national governments in the Council and the European Parliament – have considerably altered the original text during their consultations. Much was rewritten and adjusted. The Council and Parliament even completely removed a core element of the Commission’s proposal: the partial ban on commissions. The Commission had strongly advocated prohibiting payments from product providers to distributors (such as banks) in the case of execution-only sales (without advisory services). This proposal no longer appears in the documents under discussion in the ongoing trilogue negotiations.

The European Commission does not hide its frustration with this partial gutting of its draft law. Mairead McGuinness, the Irish former EU Financial Services Commissioner, who presented the proposal two years ago, publicly lamented the changes, especially those on the Council’s side, calling them „regrettable and very disappointing.“ Her successor, Maria Albuquerque from Portugal, issued an indirect threat when presenting the roadmap for the Capital Markets Union, saying the Commission would try to facilitate an agreement – but would not hesitate to withdraw the proposal if the negotiations failed to meet the strategy’s goals. The Commission always holds a „nuclear option“ in the trilogue: if dissatisfied with the Council’s and Parliament’s compromises, it can halt the process and scrap the draft.

The fate of the EU retail investor rules is also uncertain because noticeable differences persist between the positions of the Members of the Parliament and the Council – and significant divisions remain within the Council itself, i.e., among national governments. That is not surprising given the very different share investing cultures across the EU. For instance, investment is deeply rooted in Swedish consciousness – due to stock-based pensions as a fixed part of the retirement system via the AP7 sovereign fund. In the Netherlands, collective funded occupational pensions are well established. Conversely, many countries have only a small share of the population engaged with the capital markets.

In the past three weeks, the Council intensely discussed three working papers – one from the European Commission, one jointly from France and the Czech Republic, and one from the Dutch government. All offered very different, often detailed proposals for simplifying the retail investor rules. The fact that the Polish Council Presidency passed the dossier on to the upcoming Danish Presidency due to the lack of prospects for compromise shows that no real convergence has been achieved. This in turn means the likelihood is rising that the dossier will either be withdrawn or shelved for the time being.

Many in the German financial sector would not mind that outcome. The Association of German Banks and the German Insurance Association have already expressed reservations about the proposed rules. And the German Investment Funds Association (BVI) has been particularly vocal: „Practically all stakeholders are dissatisfied with it – the financial industry, consumer advocates, and regulators“, complains Thomas Richter, CEO of BVI. „The European Commission should finally have the courage to withdraw the Retail Investment Strategy.“