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Overregulation of financial brokerage services will lead to old-age poverty

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Overregulation of financial brokerage services will lead to old-age poverty

The pension systems in many countries are confronted by the same demographic problem as the German system. However, Michael Rentmeister raises the criticism that instead of encouraging private pension provision, legislators are discrediting the profession of financial brokers by continually introducing new regulations. And measures aimed at protecting consumers restrict flexibility ever further, thus taking away consumers' motivation to save. Rentmeister therefore calls for a stop to all new regulatory measures and abolition of the various state support measures and instead proposes uniform promotion of pension provision by way of tax advantages. (Ed.)

The OECD Pensions Outlook regularly paints a gloomy picture: most countries actually have to continually reduce their state pension commitments in order to ensure the financial sustainability of their pension systems. The reasons for this are well known: the profound demographic change in Europe and the decreasing financial ability of states to act because of actual excessive debt.

On average in the OECD countries, people who begin working today can expect a net state pension of a maximum of half of their average net earnings for their future retirement. But that is only if they retire at the regular retirement age after a full employment history. Unfortunately, only a very few manage this.

Thus, overall there is a threat of an alarming pension gap. The danger of poverty in old age is growing for large portions of the population. The people affected are not merely the low-earners and poorly educated people. In fact they now include the well-educated people known as the middle class – meaning a total of 80 to 90 per cent of Europeans.

It would be correct and logical to reform benefit and pension systems with the necessary cuts on a sustainable basis. Instead, more and more laws are being passed that are increasingly taking away consumers' own motivation to save. At the same time, policy must protect insurance companies against the consequences of the catastrophic low-interest-rate policy. Private pension provision is thus further impacted by a lack of consulting capacity. Although much of this happens under the popular guise of consumer protection, it is extremely alarming from a policy point of view, actually expensive for consumers and ultimately detrimental to the economy.

Commission-based consulting is the most socially just form of financial consulting

Unfortunately, it is not particularly widely known that financial brokers provide assistance on a daily basis through offering future-securing multi-disciplinary advice to people – particularly in the complicated “jungle” of self-directed old-age pensions. They motivate people to save and are often bearers of uncomfortable truths, since they also encourage people to consume less, if necessary.

Commission-based consulting, which has a long tradition in Germany and is also a remuneration model that is frequently practised in other industries such as the automotive industry, is the most socially just form of financial consulting. Customers who have higher pension provision requirements due to their personal situation pay more than customers who, for example, only have modest insurance for everyday life, such as personal liability insurance. Commission-based consulting therefore gives everyone access to affordable advice and also includes reliable guidance from the consultant as well as services and support in the event of a claim.

In addition, on the whole, consumers are not prepared to pay for fee-based consulting, as surveys regularly show.

Financial intermediation is a social responsibility

Most people in Europe basically know that they have a high need for private pension funds. However, unlike consumer behaviour, there is no need to think 40 years in advance and ruminate about what will happen when one finally retires. Pension products are “low-interest products” and very complicated. And the fact that pension products are not “tangible” creates an additional obstacle.

Earlier regulatory role models such as Great Britain have long since been exposed as countries with an ever widening gap in provision and are fortunately no longer a model for European regulatory plans. This is as it should be and also reflects the real situation in Germany, for example, as clearly demonstrated by the “Altersvorsorgereport Deutschland 2014” (Germany Retirement Provision Report for 2014):

  • Almost half of the Germans are worried about having to get by at a minimum standard of living in their old age.
  • Only 30 per cent consider their pension entitlements to be sufficient.
  • At the same time, over a quarter ignore the subject of old-age pensions completely.
  • Only 27 per cent are prepared to cut back today in favour of pensions.
  • Only half of the citizens have ever asked for consulting on the subject of old-age pensions.

A worrying situation, and one that will have far-reaching consequences – particularly for the respondents themselves.

The above aspects point to the important role of financial brokers in Europe. If people receive advice and understand at that moment that they can actually solve their problems individually with private pensions, they do so.

Financial brokerage is therefore a social responsibility, and financial intermediaries perform a social policy job that the states have failed at for a long time. For this reason, this service must continue to be compensated reasonably as well. It would therefore be wrong for the state to intervene in free pricing.

Further discrediting of the brokerage profession must stop

Continuous new ideas and discussions – which often also expose a lack of expertise – and direct or indirect state regulation of the financial intermediation industry, which to some extent has since been shown to be counter-productive, do not lead to the necessary appreciation of this task in society.

Overregulation in the financial brokerage segment will not only lead to more bureaucracy, higher complexity and additional costs. Above all, it will further reduce people's motivation to accumulate savings.

Furthermore, due to the urgent need for people to assume responsibility for their own pension provision, there are far too few financial brokers in each European country. That is why any regulation that makes the financial brokerage profession even less financially attractive and improperly discredits the profession must be stopped.

Well-intentioned is not always well-done

By this, we do not mean “just carry on as before”. OVB explicitly advocates for and supports all reasonable initiatives that lead to more transparency for consumers and sees this as the big chance to clarify the true performance strength of financial advisers and thus to improve their public image in the long term.

This includes obligatory advisory documentation, which has been standard at OVB since 1995, and finally providing uniform standardised product information, without advertising flimflam, through which the lack of symmetry – frequently also criticised by consumer advisers – in information between product suppliers on the one hand and brokers and clients on the other is eradicated. The fact that simple solutions are possible in product information has already been demonstrated in countries such as Hungary and Poland.

Disclosure of commissions in addition to transparency regarding costs, however, does not constitute reasonable additional information for consumers because it poses a disadvantage for cheaper product-provider-independent advising; the Life Insurance Reform Act (LVRG) properly did not introduce this disclosure in Germany. The policy sin of regulating commissions, such as in private health insurance, was rightly not repeated.

It must generally be said that many proposals for regulations are put on the table that in the end would only lead to a concentration that would put consumers at a disadvantage. The fact that the existing complexity leads to a situation where even specialists can scarcely assess how new laws will work is particularly problematic. It may be that politics is not lacking in good intentions. But well-intentioned and well-done are not the same thing.

Only as much regulation as necessary

Law students learn a rule of thumb during their studies: “If it isn't necessary to make a law, it is necessary not to make any laws.” This rule comes from the French state theorist Montesquieu and is noticeably applicable today.

OVB takes a simple and effective stance throughout Europe. Our aim: only as much regulation as necessary. This is fully based on the fundamental values of the social market economy, which provides for social security only for those who genuinely cannot help themselves. Overregulation under the banner of consumer protection or equal opportunity undermines the social market economy and leads to a state economy.

Unisex rates in insurance as a negative example

OVB is not criticising regulation per se, but does always ask whether it does the state any good to overmanage and whether the consequences of regulation are indeed desired. The introduction of what are known as unisex rates in insurance policies demonstrates that private insurance for citizens has not been improved but just made more expensive.

If unisex rates were actually necessary to implement European gender policy, it remains doubtful whether we were aware of its price: less opportunity to save for old-age pensions and even less financial flexibility for consumers. Both have consequences for each individual and the economy as a whole.

Further regulation increases the risk of old-age poverty

A state that quite rightly transfers more responsibility to citizens for their own old-age insurance must be aware when doing so that 30 to 40 years of saving are needed to do that. And it must give citizens flexibility for their own life plans.

But how can one get a handle on a situation that is confusing and in which there is a search for blame rather than solutions? We are firmly convinced that additional regulation and laws beyond the current ones will only contribute to further deterioration of the situation and thus increase the risk of old-age poverty in Europe.

Realign and harmonise European pension systems

We think that it all needs to be rethought. In this connection, OVB proposes a realignment in several stages while simultaneously harmonising the European old-age pension systems:

  • Stop all pending legislative proposals that include any form of additional regulation for product providers and brokers. That applies whether it's at the EU or the national level. Irrespective of whether it's IDD (which used to be IMD II), new thoughts about the company-based old-age pensions in Germany or any similar processes in other countries.
  • Reduction of old-age pensions to two pillars: the pay-as-you-go system provided by law and private old-age pensions, either on an individual or a collective basis.
  • Undo all the various state subsidies, such as Riester, residential Riester, or housing construction premiums in all countries – with protection of existing balances for existing contracts;
  • Then use tax advantages to uniformly promote old-age pensions using simple individual and collective contracts. Old-age pensions thus means only insuring pensions.
  • Use the savings from the reduction of bureaucracy to refinance the tax advantages, thus leaving more net from the same gross;
  • And, last but not least, put civil service pensions on an entirely equal basis for the future.

More individual responsibility and more options

This will achieve something important: citizens will get a clear message that they are responsible for securing their own living standards beyond the basic security of the pension system provided by law. However, they will have more capabilities as well.

The only product providers that will survive are those that actually rely on long-term customer relationships with good, transparent products. This leads to a qualitative improvement in what is offered.

A financially healthy brokering profession is an essential condition for the necessary customer-oriented qualified financial advising. We will therefore not tire of coming up with suggestions for deregulation and demanding an end to regulation instead of simply welcoming new regulations.

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