With the Decree of 30 April 2019, the Italian government confirmed the changes made earlier this year to the law on Individual Savings Plans (Piani Individuali di Risparmio, PIR) introduced in 2017. The decree specifies that PIRs opened from 2019 onwards must be invested for at least 3.5% in companies listed on AIM and for at least 3.5% in Venture Capital.
The changes are well in line with the main inspiring goal of the PIR law: provide a fiscal incentive to Italian savers to invest in the capital of Italian small companies, thus facilitating their financing and therefore their growth.
Pending the launch of the amendments, authorized intermediaries had suspended the opening of new PIRs. But it is unlikely, however, that the activity will resume. The reason is that almost all PIRs are invested in PIR funds, many of which are too large to adapt to the new investment thresholds, given the low liquidity of AIM stocks and the even more acute illiquidity of Venture Capital investment vehicles. The managers of PIR funds therefore objected to the changes, and the intermediaries that sell these funds to their customers said they were unable to revive the activity.
This is wrong. If the law is right and the tools are inadequate, these need to be changed, not the norm. Before the changes, PIR funds had to be invested for at least 21% in securities of companies not included in the MIB index. But given their size, non-MIB investments were limited to the most liquid securities, i.e. larger companies that don’t actually need the support of Italian savers. The real small and medium-sized enterprises (SMEs), those that find it more difficult to attract capital, are a small fraction of most of current PIR funds. It is therefore right to increase their required quota in order to benefit from the sizeable tax advantage granted by the law.
It looks like an incurable impasse, but in reality the solution is simple. All one needs is to clarify the confusion between PIR accounts and PIR funds.
Starting an Individual Savings Plan requires opening an appropriate investment account with an authorized intermediary. The account segregation is required by the different tax treatment of the investments made within it. If the composition of the security portfolio complies with the constraints of the law, withdrawals of money from the account after five years from the transfer are exempt from capital gain tax. The intermediary is required to control the limits and the account holder is obliged to resolve the breaches within 90 days, on pain of forfeiture of the tax exemption.
However, at the time of the passing of the law in 2017, most intermediaries – banks in primis – declared themselves unprepared for the control of constraints. Hence, pending the adaptation of their IT systems, they devised a temporary alternative: insert in PIR accounts a single investment – a so called PIR-compliant fund – in which the constraints are checked and adhered to at source by the fund management company, typically owned by the same intermediary. This is the origin of the erroneous identification of PIR accounts and PIR funds. Then, as often happens in Italy, the temporary solution became permanent, so that to this day, after more than two years, intermediaries remain unprepared and PIR accounts are still almost exclusively invested in PIR-compliant funds. But it is essential to clarify that the legal constraints refer only to the former and not to the latter.
There are very few intermediaries at the moment that offer the opening of accounts in accordance with the PIR law. The most advanced is Directa Sim. The holder of a PIR account in Directa can compose his portfolio within the account as he pleases, by investing in both funds and directly in securities, provided that he remains within the legal limits. The SIM monitors compliance by aggregating the various positions in funds and securities, and if it detects a deviation it warns the account holder, who has 90 days to fall within the limits.
If other intermediaries were equipped with similar systems – and ordinary if not trivial IT development – the PIR impasse would disappear. Integrated with AIM and Venture Capital securities or funds until the new thresholds are reached, the new PIR accounts could also continue to be invested in the current PIR funds.
To this end, the legislator could condition the opening of new PIR accounts to the development of adequate control systems, which at that point could be extended to pre-existing PIR accounts, forcing them to also respect the new investment constraints.
In addition to facilitating compliance with the constraints, placing controls at the level of PIR accounts would allow account holders to access a wider range of investment choices than the PIR funds connected to his intermediary. For example, as already happens in Directa, a saver could, following the original spirit of the law and in compliance with its limits, invest assets in a portfolio of SMEs, or in funds dedicated to them.
However, while the transfer of controls to the account would suffice to allow direct investment in securities, any investment in funds would encounter further obstacles. The restrictions imposed on Italian savers to the purchase of investment funds are old and well known, and put them at a disadvantage compared to other European savers. Contrary to security investments, where savers have access to extensive, diverse and autonomous acquisition modes in most world markets, investments in funds are subject to the existence of a preliminary ‘distribution agreement’ between the intermediary and the management company, without which access is denied. The reasons given for the refusal regularly refer to the need to precede fund investment by an advisory activity directing savers towards the funds that are most appropriate to their financial needs and risk profiles. But in reality the distribution agreement is merely a cost imposed by the intermediary to the fund management company for gaining access to its customers – a cost that ultimately is passed on to the customers themselves through management fees that are increased by the substantial share (typically 50% and beyond) that the management company is obliged to return to the intermediary based on the agreement.
A saver who therefore wanted to invest his PIR in a fund dedicated to Italian SMEs or in a Venture Capital fund – even if only marginally, in order to adjust his account to the new investment thresholds – would find impossible to do so in the absence of a distribution agreement between his intermediary and the fund management company. Therefore, paradoxically, while controls at the account level would allow the adjustment via direct investments in securities, more diversified and therefore less risky investments, in funds managed by regulated companies and approved by Consob, would be excluded.
A second desirable intervention by the legislator would therefore be to oblige intermediaries to open PIR accounts to investments in appropriate funds, without the need for distribution agreements.
Investing in funds without paying the distribution agreement duty is already possible in Italy for more than a hundred funds which have an investment class listed on the Italian Stock Exchange on the ATFund market. In theory, therefore, a saver can ask his intermediary to buy these funds in his securities dossier just as he can buy a share, a bond or an ETF. In practice, however, only Directa and very few other intermediaries are open to trading listed funds. The technical motivation typically given by the others in order to justify their denial is specious and easily surmountable. The reality is that intermediaries find it convenient to confine trading to the funds on which a distribution agreement allows them to retain part of the management fee, rather than to extend it to listed funds, where the commission, which is lower and therefore more convenient for the client, cannot be retroceded.
Recently, Borsa Italiana has added to the ATFund market the MIV market, also dedicated to Private Equity and Venture Capital funds and to ELTIFs. Funds appropriately structured and listed on this platform could be directly used to satisfy the new PIR constraints.
Savers’ access to listed fund markets would not only facilitate the management of PIR accounts, but also more generally the growth of the business – new in Italy but already well established in the rest of Europe – of Independent Financial Advisors, who, being paid directly by their clients without distribution deals, have every incentive to minimize the impact of operating costs.
A further benefit would be to encourage the creation and growth of funds, like our Made in Italy Fund, fully dedicated to SMEs, as well as of funds dedicated to Venture Capital. Through listed classes these funds they could gain direct access to savers and IFAs without going through the bottleneck – clogged and dominated by large management companies – of distribution agreements.
A greater number of dedicated funds is necessary so that access of Italian SMEs to savings is not limited to the primary market via IPOs but continues on to the secondary market in conditions of adequate liquidity. Due to their size and structure, the current PIR-compliant funds are inadequate to this purpose, and simply forcing them to be filled with unmanageable quantities of PMIs would make the problem worse. Greater liquidity can only arise from an increase in the presence of smaller and more focused funds. But for this to happen it is necessary to facilitate their access to the market.
A third desirable legislative intervention would therefore be to oblige intermediaries to open up to trading of listed funds.
In conclusion, the new rules on PIRs, introduced this year, go in the right direction of channelling a greater proportion of Italian savings towards smaller companies, which are the ones who find it most difficult to raise capital.
In order for the changes to become truly effective, we have suggested that the legislator accompanies them with three others, obliging intermediaries to
- Place the control of investment limits at the level of PIR accounts.
- Open PIR accounts to investments in funds dedicated to SMEs and Venture Capital, without the need of distribution agreements.
- Open trading to funds listed on the ATFund and MIV platforms.