Episode 11 - Fredrik Bonthron, Chief Economist, Swedish Securities Markets Association (SSMA)

00:00:03: Welcome back to the SSPA

00:00:03: podcast, your go-to series for insights

00:00:06: into structured

00:00:07: products and broader financial markets.

00:00:09: My name is Dominique Böhler from The SSPA Swiss Structure Products Association And as always I'm joined by my co-host Janine Milbrecht.

00:00:19: Hi, Janine!

00:00:20: Hi Dominique, great to be here again.

00:00:23: We're recording from interlock today because the International Structured Product Forum started Today at the Victoria Young Front in Interlochen.

00:00:33: Now we have many very interesting speeches and guests, And for those who can't be here these days We want to make this information available um To everyone.

00:00:45: That's why they're really glad to welcome Fredrik Pontron Chief Economist of Swedish Securities Markets Association with us today.

00:00:52: Welcome Fredrik.

00:00:54: Hi Janine.

00:00:55: hi Dominik thanks For having me a real nice to Be Here.

00:00:58: Thanks Thanks for your time Frederick, let's kick off immediately if that is okay for you with the first question.

00:01:04: So Europe has been talking for years about getting households individuals to invest more right?

00:01:14: Sweden have already done it.

00:01:16: how did Sweden get this point and its rest of Europe simply making investing too complicated?

00:01:24: Yeah interesting questions.

00:01:28: Sweden certainly didn't get here over one night.

00:01:32: If you go back to the nineteen eighty, so well basically fifty years ago half of household savings were through deposits.

00:01:42: if we fast forward today that share is below twenty percent.

00:01:46: So Swedish households have a lot more exposure and assets placed on the capital market.

00:01:56: As you hear, this has been a development over long time.

00:01:59: It hasn't been through single reform but rather to combination of factors.

00:02:07: There have been active decisions

00:02:11: Active Decisions by?

00:02:12: Well

00:02:13: above all Through series different tax incentives To encourage retail participation in the capital market.

00:02:20: So first such initiative was launched in the end of the nineteen seventies, nineteen seventy-eight to be very specific.

00:02:28: Then we've had a series of similar incentives slightly different in scope.

00:02:36: The last one is Swedish Investment Savings Account which was launched In twenty twelve.

00:02:43: That's super interesting!

00:02:44: The Swedish investment savings account.

00:02:47: you mentioned Important elements, but for listeners who are not so familiar with it Can you please go back one step and explain what the ISK is all about?

00:02:57: Of course.

00:02:58: So The ISK Is an account Which was launched to encourage retail participation in the capital market said The first twenty six thousand euros or three hundred thousand Swedish Krona Are completely tax-free.

00:03:18: as For the rest There is a tax, but it's not the traditional capital gains tax that we have in Sweden which is thirty percent.

00:03:29: Instead there is lower tax on the ISK which applies to total holdings and that tax rate variable changes with general interest rates level.

00:03:42: so lowest was zero point twenty seven percent.

00:03:46: for last year it was zero points nine.

00:03:51: So as you hear it's substantially lower than the traditional capital tax that we have in Sweden, but then again It applies on the total holdings rather than net profits.

00:04:02: Mm-hmm.

00:04:02: so That makes a difference as well.

00:04:08: Now the idea with that setup In terms of taxation is to make it simple Because as the tech supplies on the Total Holdings there's no tax on return And with that, there's no need to declare the transactions you make.

00:04:26: There is not any need to calculate potential net profit or net loss.

00:04:31: instead of this low tax level applied on total holdings and it has been reported by tax authorities.

00:04:44: as an average person You really don't need to do anything other than having the account and making investment decisions, either yourself or with use of a financial advisor.

00:04:56: So

00:04:57: you didn't go through the nitty-gritty stuff declaring your taxes on investments?

00:05:02: It's all done for you!

00:05:07: Why did Sweden decide to introduce this such an account?

00:05:12: I mean they wanted people more involved in capital markets.

00:05:16: What was the rationale behind that?

00:05:19: I mean, basically the same rationale behind the initiatives we are seeing today within EU and saving investment unions.

00:05:30: And i would say there two main purposes one being from a personal finance perspective.

00:05:37: of course over time having money placed on the capital market should get you higher return than simply putting them in cash or deposits, in the bank.

00:05:49: Of course, in this short term capital market can increase or decrease so your money could actually increase in value.

00:05:58: but over a longer period of time and holding period you should get higher return from the capital market than you do for the bank deposit.

00:06:08: So I would say that with my personal finance perspective That's one reason for this.

00:06:12: And to lift pressure from the governmental pension scheme as well possibly or less so?

00:06:21: No, I would... From a Swedish perspective i wouldn't say that

00:06:24: is

00:06:25: a reason because we have three pillar pension system where you had two pillars anyway.

00:06:30: So third one sort of bonus.

00:06:35: But it can be way encouraging people private investments as part of their pension savings, but I would say that also plays into this sort of personal finance perspective.

00:06:54: But then the second part is essentially what people do when they invest in a couple market is allocate savings to governments organizations, corporations financial or non-financial with the capital need for some reason to grow their business.

00:07:19: To create new job opportunities too buy companies.

00:07:25: so there's also a

00:07:28: real

00:07:28: economy perspective

00:07:30: in this supporting local economy as well.

00:07:32: then basically right

00:07:33: exactly.

00:07:34: and I mean if you look at the holdings that you are allowed to have within the ISK.

00:07:40: You can hold cash, you can hold financial instruments and basically any financial instrument shares bonds ETFs derivative structure products provided they're admitted to trading listed on a regulated market or traded in an MTF if there is then you could have them in your account.

00:08:04: You can of course also invest in investment funds.

00:08:08: What you're not allowed to invest is unlisted equity,

00:08:11: okay?

00:08:13: I mean the number suggests that this model has been quite

00:08:15: successful...

00:08:17: ...you mentioned almost forty percent of Swedish population holds minimum one ISK.

00:08:23: what do you think why it's so successful?

00:08:27: The tax incentive obviously but have there any other drivers?

00:08:33: I think, if we go back to the launch of the ISK.

00:08:39: The purpose behind launching the account explicitly was two-fold... ...the reason was to encourage private individuals as we've touched upon but their way of achieving that is two-fault One beneficial taxation But it's supposed only be somewhat beneficial And then simplified taxation simplification, making it easier for people to invest in the capital market from a tax perspective and a tax declaration perspective.

00:09:14: And out of those two.

00:09:15: I would definitely argue that simplicity is the most important explanation to this success because with these tax on total holdings as i said there's no need to declare transactions or keeping track of return.

00:09:32: Again, it's completely automated.

00:09:35: The reporting to the tax authorities made by the banks and with few restrictions in terms of what you can invest.

00:09:44: I mentioned financial instruments cash.

00:09:49: There's also no limit on the amount of money that you can put into the account.

00:09:54: there is no limit holding period.

00:09:56: so basically, You take out any time you like and there are no restrictions in terms of geographical exposure.

00:10:05: So even if you would only invest in US equity... ...you still get the same treatment.

00:10:13: The only limitation is on the taxation.

00:10:15: So, three hundred thousand kronor which corresponds to roughly you said six to seven thousand...

00:10:20: Twenty-six thousand euros?

00:10:21: Twenty

00:10:22: twenty.

00:10:22: Pardon me!

00:10:23: You have to cut that out.

00:10:23: Twenty- six

00:10:24: thousand euros.

00:10:26: The twenty-six thousands of euros are tax free or tax free exactly.

00:10:30: for the rest they have a beneficial taxation.

00:10:35: The rest has

00:10:36: just flat taxes

00:10:37: which is variable and I think we're gonna move onto broader Europe after this.

00:10:44: but I've still got one or two more questions.

00:10:46: So, the number?

00:10:47: forty percent of Swedish population what was it about?

00:10:51: four point two million Swedes which would be percentage wise if you just look at their adults will be much higher than forty percent probably?

00:11:01: That's a good number.

00:11:03: yeah children

00:11:03: can also have an ISK okay

00:11:05: Okay, so anyways no matter the adult or child.

00:11:08: Um four point two million forty percent is a big number.

00:11:11: yeah um what that lies like to also touch on?

00:11:15: I don't know if we've got this in our questions.

00:11:17: generally it's the financial literacy uh topic.

00:11:20: In order to participate you need to have a certain kind of base level of financial literacy.

00:11:26: and i remember in the presentation You just held here at the forum I think your slide showed that Sweden has got within European countries, including Switzerland the highest financial literacy or second-highest financial literacy of at least a very high financial literacy.

00:11:46: How did you manage to get there?

00:11:49: Yeah, that's a very good question.

00:11:52: And I mean there is not one answer.

00:11:56: but of course through educational initiatives actually providing financial education.

00:12:02: so we have quite few initiatives in Sweden.

00:12:09: just to name the Swedish supervisory authority has an initiative where they are out.

00:12:16: or the use external lectures

00:12:23: giving

00:12:23: presentations and lectures in financial education.

00:12:27: I've been doing those, for example within their framework And In general They're aimed at the adult part of population.

00:12:37: So i mean For me ,for example...I have been educating elderly school staff, church stuff.

00:12:46: Church

00:12:46: stuff?

00:12:47: Yeah look

00:12:48: I mean people in general who are out meeting other people can sort of give lectures further or educate forward post the message forward.

00:13:00: so that's one example.

00:13:03: you have a lot of initiatives from industry as well.

00:13:07: i mean in sweden we have something called private economists and saving economists who are out sharing information about investing, talking about the importance of diversification.

00:13:23: Investing long-term understanding what you invest in, understanding the fees that you pay not putting all your money into one asset at a time but investing regularly those kind important parts of investing.

00:13:41: We also have in Sweden an initiative called Young Personal Finance, well it's not called that... In Swedish it is a private economy.

00:13:49: but if you were to... Private

00:13:51: economy!

00:13:52: Sounds German?

00:13:53: Yeah exactly

00:13:54: yeah

00:13:55: But basically its young adults between twenty and twenty-five going out into school classes at upper secondary schools and giving lectures on personal finance, investments savings loans insurance basically everything you need to know once You start To earn money and need to make decisions your own.

00:14:27: I think that's quite interesting.

00:14:28: You shared with me in a discussion, we just said before That this is actually a topic which pupils can opt into from school if the school offers that topic.

00:14:39: Exactly so it's on a voluntary basis.

00:14:42: Yeah From the school side i mean Ultimately We would like to see everyone In school get This sort of basic knowledge because you need It when you Get Into The adult life.

00:14:54: But were not quite there yet in Sweden at least.

00:14:58: So, so... In the meantime this organization fills a very important role and they meet roughly one third of all upper secondary school students in Sweden which is really important.

00:15:13: I mean The educational initiatives that we have in Sweden.

00:15:16: They are one reason for the level of financial literacy That We Have But i would argue some of it Is also due to fact that people participate in the capital market, so basically knowledge by or learning by doing.

00:15:35: So being active By investing in the Capital Market People actually learn Hopefully without sort of bad experiences.

00:15:47: But I mean one for example One way of understanding The importance Of diversification is to not diversify your investments.

00:15:58: And I mean, ideally no one would make that mistake.

00:16:02: but again people do.

00:16:04: it's better if they do at a young age where you don't have as much skin in the game.

00:16:10: yeah It

00:16:10: is much worse when you are forty.

00:16:16: Yeah i'll leave comments just like there.

00:16:20: we've all been here hopefully in younger years.

00:16:27: There was an interesting slide.

00:16:29: I can't show it to our listeners, obviously but there's a rhetoric.

00:16:33: share with us the slide where he compared various European countries in proportioned to their bank deposits

00:16:46: how much

00:16:47: capital they have invested in capital markets?

00:16:52: i think that definition is correct.

00:16:54: so if the amount of capital they invested in capital markets equals their bank deposits.

00:17:04: And just to give our listeners an idea, In Sweden that figure is not one.

00:17:09: so four point five which means They've invested four times The amount they have got in their bank deposit.

00:17:19: Which number one in Europe?

00:17:22: I don't know where Switzerland is, it's not here.

00:17:25: But just to give you an idea for example a country which has one-on-one would be France or Spain.

00:17:31: number two three is Denmark Netherlands Norway.

00:17:35: Do Danmark Netherlands and Norway also have similar type of account like the ISK account?

00:17:43: So Norway in Denmark does and Netherlands doesn't as far as i'm aware.

00:17:52: But then I would say that if you compare the Norwegian and Danish versions with the Swedish one, The Swedish One is more far-reaching.

00:18:02: There are caps or restrictions in both Norway and Denmark In terms of the amount That You can have And the kind Of exposure that you Can Have.

00:18:11: but Yes they do have Versions on this as well.

00:18:14: Then i Would Say even More Importantly This Ratio Between Capital Market Investments deposits, also include pension savings.

00:18:28: And of course if

00:18:29: you look

00:18:30: at the size of the pension systems in different countries within EU Denmark Sweden Netherlands and Norway are also

00:18:42: bigger pension system I could imagine Switzerland is up there as well.

00:18:47: so staying beyond Sweden Is it correct that there appears to be a certain Europe-wide incentive to introduce similar ISK?

00:19:04: account solutions in other European jurisdictions, other European countries such as... I heard it wasn't Poland introducing something

00:19:12: similar.

00:19:12: Poland did introduce.

00:19:13: Ireland

00:19:14: is talking about that thing?

00:19:15: Ireland is considering.

00:19:16: yeah there are other countries looking into this.

00:19:19: well and yes you're perfectly right the EU Commission published a recommendation last year where they encourage member states to consider introducing savings and investments accounts

00:19:35: with

00:19:35: a beneficial tax treatment and or simple Tax treatment in order to encourage retail participation.

00:19:44: Okay,

00:19:45: And what would you say?

00:19:46: To these policy makers and financial industries of other countries?

00:19:51: What needs

00:19:53: to be in place to transfer this successful Swedish model in some way?

00:19:59: So I think for one, any country considering doing something similar should look at the accounts that have already been put in place.

00:20:06: And of course Sweden is won.

00:20:07: we also mentioned Denmark For example and Finland has won as well.

00:20:12: so i mean Look at those who have already done it and draw experience from The lessons learned there?

00:20:18: In Sweden It has worked Well but There are Also things with the ISK Sweden That don't work that well good practices and bad practice is to look at.

00:20:34: Then I mean, you also need take into account the state of the ecosystem in a country where we are considering do something like this because if you looked up the uptake on ISK Sweden it's not just result of the ISK and how that was rigged but results from the financial system which we have in Sweden in which the ISK was introduced.

00:20:59: But also, what I think cannot be overestimated is political support.

00:21:07: If you want people to invest long term they must be able to trust that the account is long-term as well and it won't be changed or taken away if there's a change of power.

00:21:21: So if we look at Sweden There has been several changes on political powers since the introduction of the ISK from left to right, to left again.

00:21:32: But the ISk has remained in place despite those changes of power and with that there is a confidence in Sweden among Swedes that well this account... ...is here today.

00:21:48: So I think that kind of long-term commitment Is really important for decisions decision makers if you want people to also be long-term and put money long term into accounts like this.

00:22:04: Financial literacy is high, capital markets are a topic which is close to individuals thanks

00:22:12: through the

00:22:12: investment activities... Is that one of the reasons as well why IPO activities in Sweden are extremely high on European basis?

00:22:23: there is a sound financial system in Sweden generally.

00:22:28: So, Fredrik the IPI activity in Sweden compared to other European countries it's massive!

00:22:36: It's huge.

00:22:38: Is that also result of high financial literacy?

00:22:42: In Sweden and as a result of ISK account?

00:22:48: If you forced me say yes or no I would say No because it's to simplify things

00:22:55: too much,

00:22:56: make that claim.

00:22:58: I would say if i can elaborate... It plays a part!

00:23:04: Because of course with the financial literacy and ISK you have an encouragement among retail investors.

00:23:11: It lowers the barrier for making investment decisions.

00:23:16: so it helps on demand side.

00:23:20: But then again, for a successful IPO market and the IPO activity that we have in Sweden as you mentioned.

00:23:28: Of course, you need institutional investors as well.

00:23:31: You need anchor investors And thats I think where for example the pension system comes In Where investment funds come.

00:23:40: So yes or no.

00:23:44: but also supply side needs companies.

00:23:48: You need the unicorns, you need the innovative startups that grow essentially requiring more capital.

00:23:56: We're listing on.

00:23:57: the exchange is one choice that you can make

00:24:01: or one

00:24:01: path that you could choose.

00:24:03: So so you need both supply and demand side forces in place to have that kind of activity That we are seeing.

00:24:11: then you need trust in the capital market.

00:24:13: Then you need corporate governance And you know a lot.

00:24:18: But of course, demand from retail investors is one aspect.

00:24:23: And in general what we are seeing in Sweden Is that the smaller the IPO The larger the share of retail investors and Larger the share Swedish investors.

00:24:38: So there's also a home bias

00:24:41: Because they can relate to companies.

00:24:43: They know their small company.

00:24:47: That could be one part of it.

00:24:49: Another part, I think is that once you have started investing through investment funds and perhaps single name equities And get that sort of Part your savings eventually You also start to move out on the... It's okay

00:25:11: There's a coffee machine in the background Going rogue

00:25:15: Saying its time take a break

00:25:17: Exactly

00:25:19: No, but eventually people start to sort of move out in the investment universe.

00:25:25: Perhaps making part of their portfolio exposed to you know IPOs or derivatives for structural products or other instruments?

00:25:35: Okay

00:25:36: One last question Fredrik before we release you join The Networking and Opera Part.

00:25:42: if You had to boil down the Swedish experience To one-or two lessons that you could share In Europe What would they be?

00:25:50: So all good things are three, right.

00:25:53: I will give you three but i'll keep them very short.

00:25:57: First Keep it simple.

00:26:00: Stupid Simplicity has been more important than the tax incentive itself in Sweden.

00:26:08: But of course if we can do both It is an advantage.

00:26:11: If you have to choose simplicity Is more important.

00:26:16: Two Avoid unnecessary restrictions.

00:26:19: If you can, avoid holding period restrictions your graphical exposure deposits eligible assets if You Can't avoid restriction in all of those.

00:26:30: and then three It is essential to also develop the financial ecosystem.

00:26:36: As I said you can't impose an account like the ISK out-of-the blue Where?

00:26:47: uptake that we have seen in Sweden, because when the ISK was launched in Sweden... ...we already had a fairly high level of retook participation.

00:26:56: So simplicity restricting restrictions and innovation basically huh?

00:27:06: Yeah I'm gonna

00:27:07: wrap-up.

00:27:08: We're going to wrap it off.

00:27:09: Thank you so much for being here Frederik And sharing your insights from your presentation at the ISPF today.

00:27:17: And

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