Fair-washing in the market for structured retail products? Voluntary self-regulation versus government regulation

Abstract

Regulation of the market for structured retail investment products in Germany switched from voluntary self-regulation to government regulation. In 2014, issuers of structured retail products subscribed to the “Fairness Code” as an instrument of self-regulation. A key measure of the Fairness Code was the mandatory disclosure of an “Issuer Estimated Value” (IEV) to provide information about hidden investment costs for the retail customer. In 2018, this measure became obsolete, since the new EU regulation on Packaged Retail and Insurance-Based Investment Products (PRIIPs) prescribed a direct disclosure of investment costs. We compare these instruments of voluntary self-regulation and government regulation and analyze issuers’ disclosure policies under both regimes. The new regulation effectively forces issuers to report actual costs correctly. In contrast, the self-regulated IEV was of limited use for retail investors, because (i) its definition was ambiguous, and (ii) issuers exploited this opaqueness by reporting disproportionately high IEVs. Hence, under voluntary self-regulation issuers professed transparency and fairness, but continued to hide costs in their prices.