Penny wise, Pound foolish: European Commission's Game-Changing Proposal for Transparent and Fair Pricing

This post contain affiliate links. If you make a purchase through them, I may receive a small commission, all at no extra cost to you. Read the disclaimer for more info.

We all want value for money. At least, I want value for money. For the majority of people, money is not easy to come by. We all know this feeling all too well, when we bargain for a product and get the best deal, only to find out that my neighbor had a better deal for the same product. We somehow feel cheated or feel that the product was apparently of less value than we thought it to be.

But what is value for money? Intuitively, it would mean that if we pay for a product or service, we should receive joy or benefit from the product or service that meets our expectations or even exceeds them.

From consumer perspective, it is of course also the price one is willing to pay for a certain service or product. However, there is no objective way of determining the willingness to pay. In classical economic theory, value is determined not only by the cost of production but also by its marginal utility, which can be succinctly described as how much one is willing to pay for an additional unit.

The willingness to pay for a product is influenced by an individual's mindset, assumptions about their needs, and their perception of the product's value. This is shaped by various factors, including personal preferences, financial situation, urgency for the product, and more. Additionally, how well-informed or misinformed someone is, often through marketing, and their exposure to information about the product play a crucial role. Increased exposure may lead someone to believe the product perfectly suits their needs, potentially raising the perceived value and willingness to pay. Peer influence also comes into play; if others are doing it, there may be a fear of missing out. However, if you later find that the price you paid is considerably disproportionate to the product's value, would you still be inclined to pay, or would you feel deceived?

Why do we invest and willingly pay the specified value/price? Undoubtedly, it's with the anticipation that we attain value for our money and yield profits from the investment products we've acquired. If you have read my article 'To invest or not to invest,' then you know that the European Commission is currently preparing rules to increase investor protection, one important initiative of which is to provide more 'value for money' for retail investors. The reason is that there is evidence that some investment products don't provide value for money at all, simply because of the high costs associated with them for the retail investor.

One way to tackle this problem, as proposed, is to benchmark the costs. A deviation from the benchmark will result in the assumption that the cost charged and the fees levied are apparently unreasonable or unjustified unless proven otherwise. Legally, this is, in fact, a reversal of the burden of proof, meaning that the burden of proof does not lie with the person claiming that the cost is too high. It is the investment firm that has to prove that the cost is reasonable, and the cost is assumed to be too high once it deviates from the benchmark.

The new proposal will not only amend the MiFID legal framework (the EU legal framework for investment firms, including rules on governance and authorisation) applicable to investment firms but also will amend IDD (rules for a.o. for product manufacturers) and the AIFMD and UCITS (rules for investment funds).

Overall, there shall be more justification for the costs charged and transparency in the pricing process.

I can only applaud these new rules. It seems rather obvious that the price we pay should honestly reflect the costs of the service / product, but in reality, it is hard for the consumer (retail investor) to find out how the costs came about. So, for the average consumer hoping to earn some money through investing by putting away small amounts, we end up being 'penny wise' but 'pound foolish' if the return is indeed eaten away by the costs charged, especially since investing carries risks.

For more information, please see the website of the European Commission (EC) on the retail investment package.