How Investment-Savvy is the Government?

Published on 2012/03/12

If the German Governments get its way, the “Stiftung Warentest” consumer watchdog will be successively expanded into a financial supervisory agency of sorts. In a first step, the foundation will be paid 1.5 million euros that is supposed to enhance its ability to scrutinise financial products.

Consumer rights advocates have criticised the amount as being much too small. They have got a point, for it makes a person wonder just how these 1.5 million euros in additional funding are supposed to implement Consumer Rights Minister Aigner’s stated goal to ensure the comparability of financial products and to review the statements made by investment providers along with the quality of their financial products.

It is just another measure in a string of hapless schemes that purport to show that politicians have “learned their lesson from the financial crisis”. A fine example often cited is the case of the Lehmann certificates. Did the consumer watchdog warn against these certificates at the time? No, it did not. And why should it have? Who could have known in the years before 2008 that one of the biggest investment banks would go bankrupt?

So the idea is now to set up a financial supervisory agency under the aegis of the “Stiftung Warentest” consumer watchdog in order to prevent similar calamities in the future. Worse yet than this “flash in the pan” measure is the state-run financial supervisory agency proposed by Social Democrats, Greens and the Leftists (“Die Linke”) which would be amply endowed with funds and powers. In my opinion, a virtually official quality seal of approval for financial products would mislead consumers in the worst possible way.

The Government should pass rules governing the transparency of financial products but otherwise stay out of these matters and leave it up to the individual and the market to determine which products carry the day. For there is every reason to call the Government’s competence regarding financial investments into doubt. Here is some evidence to back this hypothesis:

  • The least trustworthy financial product of all is the pay-as-you-go government pension scheme because it has always promised more than it was able to deliver. It combines each and every negative quality that a financial product could possibly have: a ridiculously low “return on investment”, poor transparency, shoddy financing, and creating a spurious sense of security.
  • For many decades, the two favourite pet projects of the German Government in the area of private superannuation – sponsored with subsidies and tax breaks counting in the billions – were endowment insurances and building loan contracts. These products have not exactly made a name for themselves on account of their high degree of transparency, modest commissions, attractive returns and model investor-friendliness.
  • The – understandably controversial – tax-saving products of the 1990s were created in direct response to German tax legislation.
  • Riester pension scheme products, which are structured strictly in compliance with government specifications, have justifiably been criticised for high costs, low rates of return and lack of transparency.

By any stretch of the imagination, the Government can hardly be considered savvy when it comes to finance and investment matters.

Of course, the consumer rights advocates of “Stiftung Warentest” are at liberty and perfectly welcome to state their opinion on financial products. But it should be remembered that the most qualified criticism in professional terms used to come not from “Stiftung Warentest” but from independent journalists and analysts. Let me mention Stefan Loipfinger who, even as many in the fund industry disliked him, should be credited with the fact that many of his criticisms have been borne out by recent developments (e.g. regarding open-ended real estate funds or closed-end funds with financing marked by currency mismatches). Naturally, even journalists and analysts can and will err. But since everybody is aware of the fact, their verdicts will be taken with a grain of salt.

The consumer watchdog, by contrast, is deeply trusted precisely because it is government-financed. Its judgements thus attain a much greater weight in the eyes of many Germans who have faith in government institutions. With this in mind, I would say: let the foundation have the 1.5 million euros in extra funding. Unlike the “bailout packages” for the debt-ridden countries in Southern Europe, the German tax payer won’t be the poorer for it. But that should be the end of it.

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