Derville Rowland: Unity creates strength
Remarks by Ms Derville Rowland, Deputy Governor of the Central Bank of Ireland, at
the 37th International Investment Funds Association Conference, Dublin, 9 October
2024.
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Introduction
Thank you to the International Investment Funds Association and Irish Funds for the
invitation to speak to you this morning. Whether by design or fortune, the timing of this
event - bringing together fund sector representatives from around the world - is fitting.
After all, this event is taking place during World Investor Week. World Investor Week is
an annual initiative by IOSCO, which focuses on providing education and information
initiatives to retail investors to raise awareness about the importance of investor
education and protection. This year's campaign themes are focused on actions to
prevent frauds and scams, technology and digital finance and providing accessible and
understandable information about the basics of investing.
Much like the work of the International Investment Funds Association, IOSCO's mission
is centred around investor protection and promoting investor confidence in the integrity
of financial markets. This is increasingly important when we consider the scale of the
asset management sector globally. Worldwide regulated open-end fund assets stood at
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over $69 trillion US Dollars at the end of the first quarter of 2024. In our respective
roles as firms, representative associations, regulatory bodies and public policy makers,
we have a duty to ensure that all investors, whether small or large, sophisticated or not,
have fair and informed access to the investment market.
When we look back to the roots of investment funds and the history of how the sector
has developed, we can see the value proposition they bring to investors. Not least
because funds can offer access to investment opportunities in a diversified and risk
appropriate manner. The first investment fund, thought to have been created in the 18th
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Century, was named for and established on the basis that ' unity creates strength' . This
theme is as relevant today as it was then.
Given it is World Investor Week, I will focus my remarks on the needs and challenges
facing retail investors and what actions we can take to support them. I will discuss the
significant changes that we have seen in the retail investment market in recent years.
Most importantly, I will outline the actions we need to take to respond to these
challenges, to ensure that the sector continues to operate in serving the evolving needs
of investors and maintains the mantra that unity creates strength .
The changing face of retail investments
We have seen a significant reshaping of the financial sector since the global financial
crisis, with capital markets and retail investment changing significantly. While capital
markets retain a central role the economy, the ways in which markets and products are
accessed has changed considerable. Digitisation has transformed how we all engage
with financial service and has reshaped the market for retail investments. This has
made the retail investment market more accessible for investors, bringing benefits for
firms and investors alike. However, it has also introduced new risks and considerations
for the sector. We must consider and keep pace with the evolving manner in which
retail investments are marketed, how information is disclosed and how products are
being sold. We must also be mindful of the competition from accessible but unregulated
products and the threats from increasingly sophisticated frauds and scams.
Existing firms will face increased competition from challenger firms, there will be a need
to innovate quickly and invest heavily in order to meet the increased expectations from
consumers. Equally, regulators need to be ready to respond quickly, to anticipate, as
well as support innovation so that the benefits can be harnessed in a proportionate and
risk-cognisant manner. Innovation is leading to new types of financial products and
services being available to retail investors. However, we know that there is still more to
be done to both grow and embed an 'investment culture'. As I have spoken about on
previous occasions, there is more to be done to encourage retail consumers to move
towards investing rather than holding their savings in bank deposits. In a European
context, figures show that at the end of 2023 , the EU27 share of global equity market
capitalisation stood at just 11% compared to 45% for the US. Moreover, this share
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declined considerably over the past 15 years. Other statistics, such as on public
listings, also paint a similar picture, where the EU share of global Initial Public Offerings
(IPOs) from 2015-2020 by value was 15%, less than half the US figure of 32%.
Savings and
The funds sector has an important role to play in supporting the
Investment Union in Europe. But more broadly, the sector globally has a role in
providing opportunities for retail investors to participate in capital markets. If designed
correctly, and sold appropriately, there are many benefits for investors having access to
investments through diversified, pooled, collective investment funds. On an individual
investor basis, the benefits include allowing investors to:
1. increase their investment opportunity set;
2. improve the risk/return profile of their portfolio (including cost control); and
3. entrust oversight of their investments to a professional investment manager.
Significantly, in terms of facilitating better outcomes for investors, an investment fund
allows an investor to participate in a diversified portfolio of holdings with a view to
mitigating concentration risk. We are reminded once more unity creates strength .
On a broader, system level basis, the sector has an important role to play in reducing
the reliance on the banking sector. I have spoken about this on previous occasions so
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will not dwell on it today. However, traditional forms of finance, including bank funding,
imposes certain costs and can lead to fragilities where an economy is overly dependent
on it.
On a sectoral basis, we know that the funds sector has generally demonstrated high
levels of resilience, even during periods of stress such as the COVID market shock.
Nevertheless, we of course must be mindful that an expanding and more
interconnected financial sector may pose risks that need to be managed.
We must also be alert to the risks from frauds and scams. We are all aware of the
emergence of increasingly sophisticated scams targeting retail investors. In Ireland, the
Gardaí recorded that fraud incidents increased by 95% between 2019 and 2022, with
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the investment fraud element increasing by 358% during that period. This is a risk to
each customer but also an issue of trust and confidence. Conscious of this growing risk
the Central Bank has recently announced that the first theme of our new innovation
sandbox programme will be ' combatting financial crime '. We will be looking at what
technological solutions can help to deliver positive outcomes for consumers and firms in
this area. We are equally conscious that the solutions to this issue do not lie solely
within the financial sector. This is why we have been engaging with a number of large
tech firms since the start of the year, including Google, encouraging them to do more to
ensure they are not facilitating consumer harm. I am pleased that progress has been
made in this regard and welcome Google's announcement that they will introduce a
verification process for financial services advertisers. An effective financial services
verification policy is a key disruptive tool in the fight against online financial scams.
How do we respond to these challenges?
At the Central bank of Ireland, core to informing our approach to respond to these
challenges, is to take a broader perspective. We must consider the views of retail
investors and how the asset management sector is working for them. Our experience
has shown us the importance of listening to these views and using insights from retail
investors to inform our annual risk assessment. They also inform our understand of
what should be done to mitigate these risks.
As such, tomorrow we will be publishing findings from our most recent consumer
research which looked at the experience of retail investors interacting with investment
firms, their views of the sector and the issues they have faced. We undertook this
research along with a mystery shopping exercise. Both of which informed a thematic
review which looked at the use of marketing and advertising by investment firms. We
will also be publishing the findings from this review tomorrow.
The insights from the research are of real value. Investors are telling us that they still
find engaging with the sector challenging in some ways. They highlight disclosures and
the provision of information as a challenge for them, saying that while benefits about
products are often explained in plain language and illustrated using graphs and visuals,
important disclosures and regulatory information (including risks, warnings and fees)
tend to use language that is more technical, and text based. This view is similar to what
we saw in previous supervisory work by the Central Bank which looked at fees and
charges. That found there is more that could be done by firms in providing clarity and
detail on the fees charged to retail investors.
The research also shows that investments are now more accessible, mainly through
digital channels. Nevertheless, retail investors with very limited experience continue to
have a number of preconceptions about investing which may adversely affect
engagement levels. This includes a sense that getting involved with investments is only
for those who have a high level of knowledge and keep abreast of the market on a
regular basis.
The research provides valuable perspectives to understand the challenges that
investors are dealing with. It tells us that while a firm may be meeting all its obligations
in providing prescribed information to investors, there are real questions on the clarity
and usefulness of some of this information. Firms need to consider if they providing
information in a way that helps investors to make decisions. Does the information
require an established knowledge base or is it accessible to someone who has never
invested before? If the information is a challenge or difficult to understand at the outset,
does that instil confidence with investors or is it more likely to attract them to products
with a simple message but less regulatory protections. Firms that consider and act on
what investors are telling them and make changes that support and inform retail
investors will be acting in an investor centric way. A strong investor culture, based on
establishing trust and confidence with investors could be what sets a firm apart in an
increasingly digital investment environment.
A prevailing theme is also the impact of different fee arrangements for retail investors
as compared with the more favourable terms offered to institutional investors. Of
course, there can be underpinning reasons for this, such as economies of scale and so
on. Notwithstanding this, a firm which has strong investor centric culture, will be
challenging themselves on such fee arrangements to assess whether they are
justifiable and appropriate.
Building an effective culture for retail investors
Understanding and addressing these challenges will require action across the board by
firms, industry representatives, policy makers and regulators. Without action to address
these issues, we risk increasing disengagement from retail investors with traditional
capital markets. We know that the trust of investors is hard earned, and easily lost. As
we seek to encourage greater retail participation in capital markets it will be important
that all of us play our role in supporting that trust. Before I conclude, I would like to
spend a few minutes discussing the challenge of how to navigate the changing and
evolving environment in a way that maintains and builds trust to the extent that new
retail investors may be attracted to engage and invest.
As you might expect, for regulators and public policy makers, this is primarily about
better investor outcomes, ensuring their interests are upheld, and client assets are
protected. High quality regulation plays a vital role in supporting well-functioning
markets. It ensures that investors are protected and that risks to financial stability are
identified and mitigated. Our interventions are intended to:
Promote and safeguard the integrity of the funds sector and maintain confidence
in the financial system more generally; and
Identify and mitigate systemic risks which may arise.
High quality regulation plays a vital role in supporting well-functioning capital markets.
There is a direct link between effective regulation and ultimately better investor
outcomes. Regulatory intervention should:
support innovation and product development to meet the changing needs of
investors and the broader evolution of the global financial sector; and
be appropriately calibrated in order to achieve the right outcomes without being
unduly onerous on market participants. Ultimately, any inefficiencies that may be
created will be borne either by the end investors or users of the financial service.
At the start of my remarks today, I noted the similarity of purpose that both the
International Investment Funds Association and IOSCO have in terms of investor
protection and promoting investor confidence. So too there is a similarity of purpose on
ensuring regulatory alignment and consistency on a global basis. Again, this is an area
where unity creates strength .
At the Central Bank of Ireland, and personally as an elected member of IOSCO's
Board, we support international efforts to set global standards and drive consistency of
regulatory outcomes. This World Investor Week, it is useful to remind ourselves of
IOSCO's key role here. IOSCO is the leading international policy forum for securities
regulators and the global standard setter for financial markets regulation. It develops,
implements and promotes adherence to internationally recognized standards for
financial markets regulation and works closely with other international organizations on
the global regulatory reform agenda. But regulatory bodies and policy makers cannot do
this work allow. Nor would it lead to efficient regulatory outcomes if we were to attempt
to tackle every issue or topic.
Industry associations and representative bodies, such as the International Investment
Funds Association, have a key role to play in supporting collaboration and encouraging
the development of best practice across jurisdictions. Of course, different countries and
regions will have their own characteristics and may require some tailoring of approach
as a result. Nevertheless, we should strive for consistency of outcomes for investors.
This will become ever more important as technology continues to reduce barriers that
would otherwise prevent cross border activity.
That founding concept which underpinned the first investment fund, that unity creates
strength, is as relevant for investors and firms today as it was then. If we are all
mutually aligned, informed and empowered, then that can only lead to better outcomes
for retail investors, capital markets and the financial sector overall.
Thank you.
1
Worldwide Regulated Open-End Fund Assets And Flows, Q1 2024 (PDF 202.72KB) ,
International Investment Funds Association Worldwide.
2
The Origins of Mutual Funds (2004) by K. Keert Rouwenhorst, Yale School of
Management.
3
ESMA , 2024.
4
Private Assets: A changing European landscape
For example, see - remarks by
Deputy Governor Derville Rowland at the Irish Funds, 10th Annual UK Symposium.
5
Report, Houses of the Oireachtas, 1 June 2023.