Sven Giegold

Mixed feelings

The last plenary week in Strasbourg before this year’s summer break was very intensive. This is why I would like to report back to you in a bit more detailed form. We took many important decisions, for example: Latvia’s accession to the Eurozone and the cut in the EUÄs budget.

Personally, I worked hardest on two path breaking votes in the financial market sector. On the one hand, we managed to save the Financial Transaction Tax (FTT) from the lobbyists. Liberals and some conservative MEPs failed to damage the instrument introducing several exceptions. At the same time I could not convince the majority of Christian Democrats, Conservatives and Liberals to adopt high consumer protection standards for investment funds. Ripping-off investors with aggressive fee structures will continue as well as the payment of excessive bonuses for fund managers in some countries. How could it come so far? The answer to that question can teach us a lot about European financial market politics.

Investment funds: Conservatives and Liberals against investor protection

Some months ago I was appointed rapporteur for the Investment Funds Directive UCITS. This Directive sets the rules for most funds held by retail customers such as equity funds. We are talking about the mind-blowing figure of 6.300.000.000.000 EUR (6.3 trillion) that this directive concerns. A few years ago the Madoff-scandal uncovered a huge fraud; depositary banks had not taken care of the administered assets correctly, many investors lost their money. The European Commission’s proposal for the Directive therefore introduced tough liability rules for depositary banks and higher sanctions. During discussions in the responsible committee many conservative and liberal MEPs tabled amendments to weaken the new rules in favour of the fund industry. The Greens pleaded for two new basic rules:

Firstly, we wanted to limit bonus payments for fund managers to a maximum of 100% of the basic salary. The German fund industry did not complain too much about that because this kind of excessive bonus payment is not common in Germany’s asset management business. The British and the French financial industry on the other hand was very upset about our initiative.

Secondly, we wanted to limit the so-called performance fees, which are one of the main reasons why fees for small investors in funds have risen dramatically in Germany and elsewhere over the years. These fees are based on a trick: When the fund outperforms a certain target value, an additional fee is charged, e.g. 25% of the additional value, on top of the basic fee. Quite often funds perform very well on the stock-exchange in one year, but have poor results in the next year. Now these additional fees, which are theoretically based on the performance of the funds, are not taken into account in the bad years. That is why investors tend to ignore them, although they have to be paid even if the fund has generated only a little extra value. The German financial supervisor (BaFin), as well as Irish and US regulators, have stopped the application of these of fees. However, the national protective rules can easily be avoided by transferring the funds in question or registering new ones in Luxembourg or another EU Member State. Consequently it was hardly surprising that the German fund industry fought very hard against my proposal.

Before the vote in the EP’s Economic and Monetary Affairs committee (ECON), the members in charge (so called shadow rapporteurs) of the Christian Democrats (EPP), Liberals (ALDE) and right wing Conservatives (ECR) tried to stop my proposals. That came as a surprise, since Thomas Mann (EPP) and Anne Jenssen (ALDE) initially agreed to my proposed compromise. During the committee vote they did not succeed, although these three parties have a big majority there. Several French, Dutch and Austrian conservative MEPs and the French liberals supported my proposals. Social Democrats (S&D) and Leftists (GUE-NGL) were in favour of stricter rules from the beginning, especially British Labour MEP Arlene McCarthy who contributed a lot. My proposals were supported with a solid majority in the final vote of the ECON committee of the European Parliament.

After the success in the committee it was my choice as rapporteur: Either I could have taken the voted text directly to the negotiations with the European Council of the Member States or I could have asked for approval of the committee’s decision by the plenary. Either way has its own advantages and risks. Committees are composed of MEPs who are specialists in the specific topic. But a mandate by the plenary has a bigger weight in negotiations with Council – and in the end it is more democratic, because all elected MEPs have to take a position.
Considering the great hurry in all financial market reforms over the last years, the plenary’s approval of the negotiating mandate has become the exception, although it should be the usual procedure according to EU’s treaties. Since the European Council was way behind in the process of decision making, I decided to take the more risky way through the plenary for three reasons: Firstly, the democratic legitimacy of a plenary’s vote is much higher. Secondly, politically it was not very likely that a majority of Member States in the Council would accept the limitation of bonuses for fund managers anyway.
Lastly, the vote in plenary makes transparent which MEPs consider stability of the financial markets and consumer protection more important than the interests of the funds industry.

During two months we tried to find compromises between the different political groups, as well as with the actors of the fund industry and the consumer protection organisations. Unfortunately, we could not reach an agreement, because the fund lobby was divided: The British and French were against limits for bonuses. The German funds lobby was not ready to let go of the rip-off with performance fees. So the European fund lobby organization Efama could not speak with one voice either.
It was only little surprise that most of the Christian democrats, Liberal and Right Wing Conservative MEPs were supporting their particular national funds industry. Shortly before the vote in plenary the three conservative / liberal shadow rapporteurs joined together and tabled in an unholy alliance an amendment for their groups neither to limit the bonuses nor to regulate the performance fees.

We Greens, together with the Social Democrats applied for roll call voting in plenary. So every member had to publicly show his or her position. Simultaneously I tried to mobilise NGOs and media. Public attention was quite big, since controversial votings in financial market questions in EP’s plenary have become rare. Almost all questions in this field are dealt with on committee level. This haseven been true for questions directly concerning the personal wallets of investors.

Right before the voting, over 90.000 European citizens signed a Campact petition for better investor protection. Articles were published in the Financial Times, Les Echos Süddeutsche Zeitung, Frankfurter Allgemeine Zeitung, Frankfurter Rundschau, Spiegel online, etc.
Research shows that after a period of 30 years, fund investors in the US have 20% more return from their investments only thanks to lower fees. The European Consumer protection organization BEUC, their German branch (VZBV) and the European Lobby of small investors Finuse also published their views supporting my position:

Personally, I tried to speak with as many Christian Democrat, Liberal and Conservative MEPs as possible. I learned that fund lobbyists were very active to stop us from limiting the bonuses as well as banning the unfair performance fees. You could feel however that their common front was weakening.

The ultimate result was very bitter. A bad day for investors protection in Europe. Votes for limiting the bonuses was 341 in favour, 348 against – very close. Only 4 MEPs could have changed the result. The vote on the performance fees was also very close, too: 335 in favour, 351 against.
This could happen only because quite a lot of conservative and liberal MEPs voted against their group’s position. Normally EPP, ALDE and ECR have a solid 60% majority in the house.

You can follow my emotional ups and downs in this 10 second video clip after the lost votes on the performance fees:

It was easier for me to overcome the defeat concerning the bonuses than the one concerning the rip-off by performance fees. The bonuses question is partially a question of principle. But for excessive performance fees, there is not one reasonable justification, at least I have not heard one.

You can find out every MEPs personal vote here:

But let’s look ahead, consumer protection in this field cannot wait. At least Parliament supported the first proposals of the European Commission to strengthen investors protection by strict liability of the depository banks for the deposits as well as strict sanctions: Existing regulation should be strengthened and harmonised across Europe to avoid regulatory arbitrage and bypassing. Numerous amendments by conservative and liberal members on committee level, trying to weaken this regulation, did not succeed. Altogether, my report still is a little more pro investor protection than the Commission’s original draft. The ECON committee now has formed a negotiating team led by the Committee’s chairwoman and myself provided with the mandate to negotiate the legislation with the Council and the Member States. The Council still did not conclude debates about the Commission’s draft. As it’s the case for many dossiers concerning financial market regulation, Member States still block necessary legislation. That is also why I recently initatied a Parliaments resolution criticising the Member States for their poor decision taking:

It was an unsatisfactory week for us. Too many MEPs, obviously, are not ready to really change the culture in the financial industry – the excessive bonus culture will not come to an end soon. The European Parliament foiled its own success of limiting the bonus payments for bankers some weeks ago.

In the upcoming negotiations we will have to defend Parliament’s position against some Member States, who have found their role as the most effective mouthpiece for their particular financial industry. Germany could be an ally in regulating the financial industry. The BaFin (supervising authority) already has set up rules, allowing performance fees only in a restricted manner. These national rules, thanks to the Christian Democrats, Conservatives and Liberals, can still be avoided by registering the funds in Luxembourg and selling them in Germany. There’s still hope, though, that the proposed ending of this practice will revive.

Financial Transaction Tax: European Parliament defends the tax against the lobbyists

During the same week we voted on Parliament’s position for a European Financial Transaction Tax (FTT). The Economic and Finance Ministers of the EU had finally come to an agreement in January to introduce the FTT in an enhanced cooperation in 11 EU Member States. The proposal on the table foresees a tax of not less than 0.1% on transactions with stocks and bonds but also includes taxation of derivatives transactions of not less than 0.01%.
The financial lobby has made great efforts during the weeks prior to the votes to persuade MEPs to vote for various exceptions. Many opponents of the tax in the financial industry and in politics have changed their strategy in recent months.
Instead of opposing the tax directly, they demand exceptions. It sounds appealing to exclude e.g. pension funds from the Financial Transaction Tax. Then, however, fair competition between life insurance and many investment funds is not possible anymore. Allowing many exemptions would be the end of the tax. It is quite simple: either all are taxed or none. Only then tax collection is simple and inexpensive.

Fortunately, we managed to preserve the core of the proposal. The Parliament voted by a large majority for a tax that applies to a large number of financial products and market players. I have been fighting for the original proposal by Professor James Tobin for ten years now. It is therefore a great success for me to see the European Parliament voting for taxing currency transactions. On this point European Parliament is going further in its position than the EU Commission.

To achieve a broad tax base in the original proposal pension funds and other mutual funds were not exempted from taxation. Many conservative and liberal Members of the European Parliament intended in first place to vote for an exemption for those instruments. With a compromise across political groups we luckily managed to avert this disastrous outcome. Unfortunately, this compromise came at a price. We had to agree to a couple of exemptions we consider to be useless and even harmful. In tax matters, the European Parliament is not involved as co-legislator but only has to produce an opinion. Our opinion on the Financial Transaction Tax is not binding for the Council. Although the Parliament managed to pave the way for the tax it is now the Council’s job to go down that road. The 11 Member States in the framework of enhanced cooperation bear the responsibility to agree on the broadest possible tax base and effective controls. It is crucial to keep up the pressure from civil society, to ensure that the industry lobby does not succeed in influencing those who have the final say on the binding rules.

I will continue to fight for fairer financial markets and better investor protection in Europe. In September I will be back with the latest stories from the European Parliament!

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