Check against delivery.

Ladies and Gentlemen,

"Opportunities and challenges of proportionate regulation" is the topic that you assigned to me for my presentation today. This is, I must say, a clever title that broaches head-on an issue that lies at the core of many heated debates: the constant balancing act of financial market regulation, which has to keep a secure grip when it comes to protecting financial stability and market participants while at the same time needing to remain predictable for the financial industry.

It is in the nature of things, ladies and gentlemen, that your views, as representatives of regulated institutions, will differ from those of supervisors and financial regulators on certain points. But I do not want my speech today to be seen as a derby, in which two rival teams battle it out.

I am not here to sing the praises of the regulatory status quo, accompanied by the battle cries of the away team and the approving yells of the home team, in keeping with the motto: it's perfect just as it is. (Although, Mr Richter, we would still need to agree on which of us would take on the role of the ultras.)
In view of the high degree of complexity of regulation in the asset management and investment industries, we can see that the question about proportionality is undoubtedly justified. However, one thing that you will not hear me do is support the proponents of looser regulation. Indeed, I have been watching the occasional crescendos in the chants for deregulation with considerable concern for some time now.

One lesson we learned from the financial crisis in 2007/2008 is that transparency and integrity in the financial markets play a significant role in financial stability. For this reason, all of us, in the community of regulators and supervisors as well as in the industry and in society, should fundamentally have an interest in regulatory consistency.
Otherwise there is the risk of another regulatory "pork cycle" of crisis – regulation – deregulation – another crisis. We should therefore look back and ask ourselves about the torque that started the motor for present-day regulatory measures and at the same time made securities supervision, the most recent distinct supervisory discipline, one of the most active fields in financial supervision. For as the recently deceased former Chancellor of Germany, Helmut Kohl, was already well aware, "he who does not know the past cannot understand the present or shape the future."

So let us take a look to the past – or, more precisely, to the moment that set the wheels in motion for the financial regulation we have today. Banks were starting to securitise and sell to third parties risks which they had previously had to keep on their balance sheets for the long term. A business model dubbed "originate-to-distribute" was born. The underlying assets were mostly U.S. mortgages on residential properties, largely from the subprime category.

Well, we all know the ending to the story: on 15 September 2008, the American investment bank Lehman Brothers collapsed and the global financial system was thrown into shock.

And along with it, another thing that constitutes the basis and the driving force behind our entire financial system also started to fall to pieces: investors' confidence in the financial markets. The financial crisis per se was quickly followed by a crisis of confidence, with the entirety of the investment and asset management industries starting to be regarded with general suspicion from one day to the next. Management board members of banks and sales representatives were in the public pillory for selling products to investors that they didn't properly understand themselves. All too often, the focus was on achieving the highest possible commission rather than on the customer. Of course, it was the black sheep back then that brought the whole industry into disrepute. And yet your industry has still not fully recovered from the reputational damage even today. But, to take Erich Kästner's motto, "nothing is good if it isn't done", we can see that efforts have been made in your industry, too, to develop good, fair investment products and to support customers with proper, transparent distribution.
These developments are important, they are right, and they are supported by the corresponding regulatory framework of post-crisis regulation. I am sure that this approach can win back confidence in the financial markets. Even in the future, though, regulation will never be able to pre-emptively eliminate every conceivable uncertainty. But that is not the job of regulation, either. What financial institutions and their customers can expect, however, is dependability in regulation.

Moreover, the reason that the crisis was able to spread so rapidly and that it led to a huge loss of confidence in the markets was that regulation in the pre-crisis era was insufficient. The responsibility for this lies primarily with the prevailing economic ideas of the 80s. Building on the concepts theorised by economists such as Milton Friedman and Friedrich August von Hayek, who associated neoliberalism almost exclusively with a lean state and markets that were as free as possible, in the years leading up to the crisis a situation was created that John Maynard Keynes and, later, the British political scientist Susan Strange referred to as "casino capitalism"¹. That was, and is, a catchphrase, of course.
But it remains true that speculative transactions supplanted the financing of value creation in the real economy. Of course, that had to be responded to with clarity by regulators, because time and again prior to this banks and investment firms had taken a liberal approach in applying the existing rules. It was often not possible for the purchasers of financial products to correctly assess the true riskiness of the products. This was something that the heads of state and government of the G20 were also aware of when they set out the goals for post-crisis regulation and initiated a set of guiding principles in November 2008 at the global finance summit in Washington.

This includes the Markets in Financial Instruments Directive MiFID II, which the German press likes to refer to as an "administrative monster"², and the associated regulation MiFIR, as well as a vast number of implementing provisions, technical standards and guidelines, to name but a few. All of these specify documentation, publication and reporting obligations and are intended to improve transparency and integrity on the securities markets.
However, post-crisis regulation should also be as efficient as possible and, at the same time, not limit the markets too much while dealing with the respective areas of business in a manner appropriate to their risks, i.e. proportionately. Here too, it is clearly difficult to say where the boundaries to regulation should be drawn in each individual case, and this means treading the fine line between too much and too little again and again. It is not surprising that such a legislative process entails fierce debates about where exactly this line should be drawn. I think it is time to collect practical experience so that adjustments can be discussed in a few years' time, as is the case with other regulatory reform packages.

In particular with MiFID II, which comes into force in exactly 98 days, on 3 January 2018, it must be ensured that the standards are applied with the appropriate degree of proportionality. This relates firstly to the product governance rules, which provide for the regulation of a financial product from the cradle to the grave. This monitoring of the entire life cycle is intended to comprehensively protect retail investors in an increasingly complex world and to minimise the information gap that exists between them and professional investors.
And that is the right thing to do, for it is the only way to ensure fair conditions on the financial markets. Investors usually do not have the same expertise as the offerors to fully understand products to the depth required and assess the promised return levels. The product approval process for manufacturers of financial instruments therefore represents a significant step forwards in investor protection. Customers should now only be offered products that meet their investment objectives and requirements, that they understand and are in a position to bear financially and that match their risk appetite.

To this end, a target market must be identified for each product – as you all know. Of course, this approach requires in depth communication between the manufacturer of the product and those who distribute it. Many of you already have similar processes in place today, but often only as isolated solutions. In the future you will need to connect these together. This is the only way to ensure that the required information reaches all of those involved in the process. This even applies to the extent that if a manufacturer does not fall under the rules and regulations of the Markets in Financial Instruments Directive, the distributor takes on the task of determining the target market.
You, ladies and gentlemen, have already contributed to a joint standard setting process with the German banking sector and reported that the fund industry would, for the most part, voluntarily provide a manufacturer's target market. That is important and right, and shows that you are emphasising good cooperation in your industry.

We, as supervisors, are also conducting numerous discussions – both with you and with the European Securities and Markets Authority, ESMA – and are thereby helping to shape the organisational implementation of the product governance regime. This makes sense in order to ensure that we do not run the risk of creating a welter of rules and complexity which could jeopardise the comprehensive provision of financial products. That cannot be a reasonable goal for regulation.
For instance, we have been advocating ensuring that the approach taken with regard to the target market in the distribution of financial instruments remains workable. As an example, it can sometimes make more sense for customers to obtain a financial instrument for which they do not actually fit the target market, perhaps if it is to be used for hedging or diversification to mitigate risks.
A holistic approach like this, one that looks at all of the assets held in a customer's portfolio rather than exclusively at the conclusion of the individual transaction, is the type of approach taken by many German institutions and we do not, of course, want to prohibit this. We are available and ready to discuss such questions regarding the application of the new regulations with market participants, the portfolio approach I just mentioned being only one example among many.
There was also a significant need for discussion regarding the new rules for financial analysis and research. In the future, asset managers that provide investment services will only be permitted to buy research separately and without a link to the order volume. Moreover, the price for the research must be stated explicitly. The European legislator hopes that this "unbundling" will reduce conflicts of interest in best execution, improve competition between offerors and increase asset managers' accountability obligations when using research. Of course, we can only hope that these new rules will lead to improvements for all market participants in the long term.

To ensure that research continues to help asset managers to make good investment decisions for their customers, there is a need for careful judgement as European administrative practices are developed. We are already actively involved with this in the respective ESMA working groups.
Another question regarding the application of the regulations relates to the new rules regarding cost transparency, under which all of the costs of financial instruments and investment services will have to be disclosed to the customer. That costs for funds, certificates and life insurance policies will be made completely visible and comparable will allow the information imbalance between offerors and investors to be rectified. And so it is not surprising that even in 2011 one of the legislator's chief concerns was to ensure that changes to provisions relating to the costs of a fund were disclosed to investors. As you know, the UCITS IV Implementation Act went even further than the European provisions. Asset management companies were not only required to inform investors via a durable medium when a fund was merged, but also when the fee structure of a fund was changed at a later date.
It almost goes without saying that this didn't exactly get a standing ovation from your industry, because you had to spend a great deal of money on informing all of your investors. At that time, however, this was the right step in order to protect investors. And today, six years on, investor protection is again in central focus in current European regulation. Under MiFID II and the MiFID II Implementing Regulation, investors must be informed of the ex ante and ex post costs for both investment services and the respective product. If the costs subsequently change, the investment firm is usually also required to inform the investor via a durable medium.
As most funds are distributed by investment firms and these have to abide by the new regulations regarding cost transparency, it has yet to be decided whether the asset management companies' existing obligations can be withdrawn. We intend to discuss this question with the Federal Ministry of Finance.
Under the new Markets in Financial Instruments Directive, discussions still need to be held regarding the question of how costs are defined, as opinions differ on this issue. The same is true for the question of how the costs are calculated.
It is clear that there is no "one size fits all" method for calculating costs. Detailed calculation methods that suit the financial product need to be found. Initial attempts at this have been introduced by the European PRIIPs Regulation, which brings in standardised key information documents (KIDs) focusing on the characteristics of the product which are central to the investment decision. But some aspects of this are imprecise as well, making it more difficult to deal with the rules in practice. As a result, the methodology of the PRIIPs regulation cannot always be applied under MiFID II on a one-to-one basis. And as if these challenges weren't enough already, we have to remember when considering all of these very technical questions regarding cost transparency that this information is for retail investors. The key issue for regulation is ensuring sufficient, comprehensible and at the same time structured information.

Time will tell how this approach works in practice. When it comes to PRIIPs KIDs, retail investors can continue using tried and tested processes for investor information on funds, at least until the end of 2019.

But even during this transitional period, cost transparency under MiFID II and the PRIIPs regulation will be subject to intense debate – particularly at the level of the ESAs, where the new rules are now due to be implemented in practice. As before, we are participating very actively in this work in order to get as close as possible to the goals that regulation strives towards and keep undesirable side-effects to a minimum.

Just as we strive for proportionality at the regulatory level, such as in MiFID II, so we strive for prudence in practical supervisory actions as well. Let us take our activities in the field of product intervention as an example. This is a very sharp sword, and we use it in our supervisory practice only as a last resort, after careful consideration. We used this sword for the first time a few weeks ago to ban the distribution of financial contracts for difference (CFDs).

CFDs may now no longer be offered to retail clients with an additional payments obligation.

And for good reason: investing in these financial products with an additional payments obligation is like a game of chance – with the decisive difference that it is not only an investor's capital that is on the line but parts of their other assets as well. We took similar action with the planned product ban on credit linked notes last year, which your industry responded to with a far-reaching voluntary commitment. This showed us that it is almost secondary whether we pull out the sword in a given case; the important thing is that it is there on display in the corner.

Ladies and Gentlemen,

If, in conclusion, you ask me whether I think that securities regulation in the post-crisis era is fully proportionate, my answer is: not yet. Readjustments still need to be made here and there. Proportionality, discretion and learning from experience are important and welcome; a huge leap in the opposite direction is clearly not. The art of proportionate regulation is finding the thin line in the middle.

Just like in football, where the combination of many different factors is what leads to success, good regulation is always a collaboration between all of the players. Legislators and regulators need to weigh up the situation and keep striving anew for proportionality. This process can be helped along by regular contact and good communication with the regulated industry. This contact keeps everything grounded. The reality should be – and here I speak, I hope, both for supervisors and for the industry – to strengthen consumers' confidence in the market and guarantee it in the long term.

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