Overview: the new EC Retail Investment Strategy

As the EC’s daunting new package continues to prompt debate, here is a summary of the main legal proposals.

“This is the most ambitious legislative proposal since the inception of EU financial regulation”.

Mairead McGuinness, EU Commissioner for Financial Services, Financial Stability and Capital Markets Union (24 May 2023)

Background

The European Commission (EC) has formally adopted a new Retail Investment Strategy (RIS) package of measures.  This follows concerns that capital markets “do not serve the long-term financing needs of EU citizens”, who are too often “heavily reliant on low-yielding savings”.

The new RIS aims to improve the EU financial services framework by “empowering” consumer investors to “make decisions aligned with their needs and preferences”, while ensuring “they are treated fairly and duly protected.”

The EC has identified four “significant problems along the retail investor journey” that must now be rectified:

• Scarce access to relevant, comparable, easily understandable product information to assist informed investment choices
• Risk of inappropriate influence: unrealistic marketing information (via digital channels); misleading marketing practices
• Shortcomings in product manufacture, distribution: e.g. conflicts of interest, arising from the payment of inducements
• Certain products entail “unjustifiably high” cost levels: these “do not always offer Value for Money to retail investors”

Alongside their press release, the EC published a factsheet and Q&A website to clarify their main objectives.

RIS legal package: “to protect and empower EU retail investors”

At the heart of the EC’s collection of RIS documentation and supporting materials are two wide-ranging legal propositions said to “form a package strengthening retail investor protection …where both proposals mutually reinforce each other”.

• The ‘Omnibus’ Directive paper (123 pages) covers EU retail investor protection rules applied across five EU Directives
• The PRIIPs Regulation paper (17 pages) targets specific amendments to modernise the EU key information document.

These are supported by the EC’s extensive Impact assessment report (325 pages).

Once the EC legal materials are available in all EU languages, there will be an eight-week long period for comments.

Responses within the final deadline (currently 24 August 2023) can be viewed using the EC’s stakeholder feedback timeline.

All feedback will be presented to the European Parliament and Council, with the aim of “feeding into the legislative debate”.

Omnibus’ Directive: to strengthen retail investor protection rules

The first part of the EC’s RIS legal package is a draft “Omnibus” Directive, proposing amended retail investor rule changes to five major EU Directives: UCITS, AIFMD, MiFID II, IDD and Solvency II.

In this document, the EC specify nine provisions to align the separate legal regimes with each other, alongside the PRIIPs Regulation.  Those of particular interest to Kneip clients include :

• Product oversight & governance rules (UCITS, AIFMD, MiFID, IDD, PRIIPs)

The most controversial part of the EC’s RIS proposals are a set of amended rules to ensure “undue costs” are not charged, while products deliver “Value for Money” to retail investors.  These apply also to the PRIIPs regime.

All EU firms manufacturing and distributing retail investor products are obliged to enforce a “clear pricing process”, to identify and assess all costs and charges.  Prior to market offering, UCITS and AIF firms must also compare their products against cost & performance benchmarks (made available by the European Supervisory Authorities).  These may be similar to those ‘common benchmarks’ under development by EIOPA since 2021.

Product assessments must occur on an annual basis; to ensure retail investors obtain “value for money”, costs must be demonstrably “justified and proportionate”, with any “undue costs” reimbursed to clients.

Firms will also have to report specific product information (i.e. costs, performance and risk levels) to their home NCA. ESMA and EIOPA are tasked to define new specifications on the data sets and standards / formats.

NB: these EC proposals follow the FCA UK Consumer Duty, which includes a ‘Price and value’ outcome.

• Simplify and reduce Disclosure information presented to retail investors (MiFID, IDD, S2)

Proposals here include a standardised client disclosure of all costs and charges (including payments made by third parties).  There will be a new product information document for life insurance products (not covered by PRIIPs); in addition, all information supplied by MiFID Investment firms and IDD insurance intermediaries will become ‘Digital-by-default’, with EU supervisory authorities empowered to impose use of risk warnings for certain products.

• Protect retail investors from “misleading” marketing (MiFID, IDD)

Alongside new definitions of ‘marketing communications’ and ‘marketing practices’, firms will be obliged to address the risk of “unbalanced” or “misleading” marketing, with NCAs able to take “timely and effective action on non-compliance”’.

• Tackle “bias” in the advice process (MiFID, IDD)

Rules will be revised in relation to the payment of inducements (with an “execution-only services” exemption).

• Client categorisation: ease restrictions for investors to qualify as ‘professional’

The wealth criterion has been reduced from EUR 500 000 to EUR 250 000.

• Strengthen supervisory enforcement

NCAs will have additional measures to strengthen supervisory enforcement, including those covering digital channels and cross-border service provision.

 PRIIPs amended regulation: to modernise the EU-KID

The second part of the EU-RIS package is a set of ‘targeted’ PRIIPs level 1 changes, in order to make the key information document (KID) more user-friendly and fit for the future, ahead of inclusion within the European Single Access Point (ESAP).

Notable amendments proposed by the EC include:

• A new legal definition: ‘electronic format’

In due course, this will be the default KID medium, unless the investor requests a paper version

• EU-PRIIPs KID: “modernised and simplified”

To follow the example of the pan-European personal pension product (PEPP) document, the KID will be provided by means of an ‘interactive tool’, enabling investors to generate personalised key information based on the information in the PRIIPs KID or underlying information.  Potential clients should be able to simulate costs over the recommended holding period, and compare different PRIIPs, online.  Functionalities are also required will make information accessible to persons with disabilities (incl. the visually impaired).

• Added: two new PRIIPs KID sections

The ‘Product at a glance’ section will highlight summarised information covering ‘Investment product type’, ‘Costs’ , ‘Level of riskiness’, ‘Recommended holding period’ and ‘Presence of insurance benefit’.

The ‘How environmentally sustainable is this product?’ section will disclose specific information for retail products within scope of the SFDR, including ‘minimum proportion of “environmentally sustainable” investments’ and ‘expected GHG emissions intensity associated with the PRIIP’.

• Removed: PRIIPs KID ‘comprehension alert’

The EC admit this may have discouraged retail investors from purchasing less complex investment products.

• Amended rules: multi-option products (‘MOPs’)

Fund firms are to provide “tools adapted to retail investors” to facilitate research and comparison among the different investment options (including costs). There must also be easy access to pre-contractual information documentation.

Next Steps

Once finalised and approved, the EC’s proposed RIS Omnibus Directive will enter into force 20 days after publication in the Official Journal of the European Union (EUOJ).  In due course, EU member states must adopt and publish their local transpositions within 12-18 months.  The revised PRIIPs changes will also enter into force 20 days after EUOJ publication and then legally apply 18 months thereafter.

At the same time, the European Supervisory Authorities (ESAs) have been tasked to draft many sets of Technical Standards, Specifications and Guidelines.   These will require the usual consultation due process.

How Kneip can help

Clearly, the Retail Investment Strategy will continue to attract much industry attention in the months ahead.

Kneip are well positioned to monitor the progress of the RIS legal package, including those opinions expressed by the members of our fund associations.  We will arrange a webinar on completion of the current feedback process, including an impact assessment  based on the EC’s finalised proposals.

In the meantime, feel free to contact your Product Owner or Account Manager with any queries you may have.