EU plans to enhance protections for retail investors
The European Commission (the “Commission”) has recently adopted a retail investment package which, the Commission states, aims to place consumers’ interests at the centre of retail investing and empower them to make investment decisions that are aligned with their needs and preferences (see here).
The Commission retail investment package consists of two legislative proposals:
- A proposed Directive amending the UCITS Directive, Solvency II Directive, AIFMD, MiFID II Directive and Insurance Distribution Directive as regards retail investor protection rules (referred to as the “Omnibus Directive”) (here); and
- A proposed Regulation amending the PRIIPs Regulation as regards modernisation of the key information document (here).
Background
Investor protection rules are currently contained in several sector-specific pieces of legislation, such as MiFID II1 and the UCITS Directive.2 The Commission explains that these rules can differ between financial instruments and are sometimes inconsistent leading to cumulative requirements which may be confusing for retail investors. Additionally, the Commission notes that digitalisation has resulted in changes to distribution models and to new forms of marketing of financial instruments towards retail investors.
A key objective of the Commission’s Capital Markets Union Action Plan 2020 (here) is to make the EU an even safer place for citizens to invest in the long term. The retail investment package aims to achieve that goal and encourage participation in EU capital markets. EU retail investment has traditionally been lower than in other jurisdictions such as the US even though Europeans have very high savings rates. The Commission hopes that the new rules contained in the retail investment package will help channel private resources into the economy and fund the green and digital transitions.
Highlights of the Retail Investment Package
According to the Commission, the retail investment package include ambitious and wide-ranging measures.
|
Disclosure |
The package will change the existing disclosure rules to respond to digitalisation and to meet investors' growing sustainability preferences. For example, investment firms, insurance intermediaries and insurance undertakings distributing insurance-based investment products will be required to display appropriate risk warnings in all information materials concerning particularly risky products, to alert retail investors to specific risks of potential financial losses. |
|
Costs |
New rules will increase transparency and comparability of costs by requiring the use of a standard presentation and terminology on costs. The Commission notes that existing provisions on undue costs are currently included in Level 2 of the UCITS Directive and the AIFMD, and in ESMA's Level 3 provisions. ESMA has highlighted the lack of convergence in the area of undue costs. The package will include new provisions in the UCITS Directive and AIFMD to define the conditions for considering that costs are due and provide rules in the pricing process to ensure that these conditions are met. |
|
Inducements |
The package introduces restrictions on inducements based on a staged approach. The Commission states that the package does not provide for a full ban on inducements, but instead introduces a set of restrictions and safeguards in relation to inducements, together with increased transparency requirements, as well as safeguards relating to advice, by:
The Commission states that, as a second stage, three years after the adoption of the package, the Commission will assess the effects of inducements and the impact of the newly introduced rules, and may, in case of continued consumer detriment, adopt strengthened rules. |
|
Marketing |
To protect retail investors from misleading marketing, the package will ensure that financial intermediaries (such as advisors) are fully responsible for the use and misuse of their marketing communications. This will include where marketing is done via social media, or via celebrities or other third parties they remunerate or incentivise. |
|
Advisors |
The package intends to preserve high standards of professional qualifications for financial advisors. As an example, it is proposed that MiFID II will be amended to include specific requirements for advisors (including regarding sustainable investments) and compliance with requirements will need to be proved by obtaining a certificate. |
|
Professional investors |
The new rules are intended to reduce administrative burdens and improve the accessibility of products and services for sophisticated retail investors, by making the eligibility criteria to become a professional investor upon request more proportionate. Amendments to MiFID II include a reduction in the wealth criterion from €500,000 to €250,000, a fourth possible criterion relating to education or training and the possibility for legal entities to qualify as professional. |
|
Supervision |
The package is intended to enhance supervisory cooperation to make it easier for national competent authorities and European Supervisory Authorities to ensure that rules are properly and effectively applied in a coherent manner across the EU and to jointly fight fraud and malpractices. The measures to strengthen supervisory enforcement will focus particularly on the growth of digital channels (such as misleading marketing practices) and the cross-border provision of services (such as a reporting requirement for investment firms and insurance distributors on their cross-border activities). |
|
Financial literacy |
The package is intended to empower consumers to make better financial decisions, by encouraging Member States to implement national measures that can support citizens’ financial literacy, regardless of age or background. |
|
Performance |
The package includes measures to ensure that all retail investor clients receive at least annually a clear overview of the investment performance of their portfolio. |
Comment and Next Steps
The proposed retail investment package will bring sweeping changes to the rules for many financial products and services offered to retail investors. The Commissioner for Financial Services, Financial Stability and Capital Markets Union, Mairead McGuinness, commented that this package is “the most ambitious legislative proposal since the inception of EU financial regulation” and “delivers real benefits for retail investors, and puts their interests, their protection and their investment objectives centre-stage”.
However, a joint industry statement released on 6 June 2023 notes that “many measures in the proposals are far-reaching and raise multiple concerns” and, in particular, note that prohibitions on the payment of commissions in the proposal would “have major disruptive consequences for the European financial sector and consumers’ access to investment and insurance protection” and “the overwhelming volume of requirements adds complexities that are highly likely to discourage consumer engagement”. The joint industry statement also expresses “substantial reservations on the new “best interest of the client” test. The proposed approach, which disproportionately focuses on costs, may lead clients to prioritise the “cheapest” product over others that could potentially offer them greater value. We note that such an outcome would be, in fact, contrary to the client’s best interest.3
The publication of the retail investment package by the Commission is the first step in the EU’s legislative procedure. The Commission has requested feedback on the legislative proposals by 3 August 2023 (see here). The retail investment package will then progress through the legislative process and is likely to be further revised by the Council of the EU and the European Parliament before being adopted, likely to be no earlier than 2025.
Also contributed to by Jonathan Murchan
- Directive 2014/65/EU
- Directive 2009/65/EC
- https://www.ebf.eu/ebf-media-centre/joint-industry-statement-on-the-eu-retail-investment-strategy/
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.
Select how you would like to share using the options below