EU investment funds need overhaul to exploit single market, says report

By Huw Jones

LONDON (Reuters) -The European Union’s 19 trillion euro ($21.6 trillion)investment funds industry is failing to exploit the bloc’s single market, saddling investors with high costs and opaque selling practices, the European Court of Auditors said in a critical report on Monday.

A full review of EU investment fund rules is needed by 2024 as minor revisions will not be enough to create a better market, according to the independent EU body which looks after the interests of the bloc’s taxpayers.

The EU’s single market seeks to tear down cross-border barriers to trade and offer customers more choice and competition.

The pan-EU funds sector was born in 1985 and is second only to that in the United States, but individual EU funds remain smaller than their U.S. equivalents.

Almost 70% of the market remains concentrated in four of the bloc’s 27 states – Luxembourg, Ireland, Germany and France – with little cross-border investment, the auditors said.

“The objective of a true single market for investment funds has not been met, and cross-border activities remain rare,” they said.

“Funds are still not supervised consistently across all member states, investor protection remains weak, and systemic risks are not adequately monitored.”

A spokesperson for the European Commission said it regretted that the ECA did not fully recognise the achieved benefits of the single market for investment funds.

The timing of the audit also did not allow for recent changes and new legislative proposals to be evaluated, including rules to remove barriers, the spokesperson said. “The EU has a robust regulatory and supervisory framework governing collective investment funds in place.”

In their report, the auditors said that many of the expected gains for investors, such as lower fees and greater choice, have not yet materialised as costs continue to be high and difficult to compare between EU countries.

Greenwashing, or companies overstating their sustainability credentials, is also a problem as such labelling is unregulated, they added.

The EU’s executive European Commission has made several amendments to EU investment fund rules over the years, but it was not always able to show their merits, and benefits may have overestimated, the report said. The commission’s own performance measurement for the sector does not comply with its own criteria.

The EU executive should carry out a comprehensive fitness check on legislation covering investment funds by 2024 and, depending on its outcome, take steps to achieve the objectives of the single market more effectively, the report said.

The bloc should also consider giving its securities watchdog ESMA powers by 2024 to force national regulators to supervise the funds sector properly and consistently, it said.

($1 = 0.8812 euros)

(Reporting by Huw Jones; Editing by Tomasz Janowski and Hugh Lawson)