The European Commission’s long-awaited Retail Investment Package (published yesterday, 24 May 2023) forms part of the 2020 Capital Markets Union Action Plan.  It is designed to increase retail investors’ participation in EU capital markets by improving trust and confidence (in particular in relation to financial advice) and support better investor outcomes.

Retail investor participation in EU capital markets remains quite low when compared to other advanced economies (17% of household assets versus 43% in the US), with much household wealth held by way of bank deposits (at low interest rates).

To address this, the package proposes changes to the existing rules set out in the MiFID II Directive, the Insurance Distribution Directive (IDD), Solvency II, the UCITS Directive, the AIFMD and the PRIIPs Regulation – to date, the rules set out in those directives/regulations have been seen as inconsistent (and therefore confusing for prospective retail investors).

While the scale of the changes may evolve as the package is considered by the EU Council and the European Parliament, some key features are:

• Inducements: As expected, inducements will be banned for execution-only sales of investment products.  While the Commission decided (after lengthy consideration) not to ban inducements for advised sales, additional safeguards have been proposed (such as a strengthened ‘best interests of the client’ test).  The Commission will also be tasked with reviewing whether those safeguards have in fact reduced potential conflicts of interest 3 years post-transposition.  In line with the ever-growing importance of sustainability preferences when making investment decisions, among the changes proposed to improve the knowledge and competence of financial advisors is the inclusion of an additional limb regarding professional knowledge of sustainable investments.
• Disclosure: Disclosure rules will be adapted to reflect digitalisation and sustainability preferences.  For instance, the PRIIPS Key Information Document will be updated to introduce a summary dashboard, give more flexibility on how information is displayed (to facilitate viewing via digital devices), include a section on the sustainability-related characteristics of the investment product, and clarify the exclusion of certain products from the scope of the PRIIPS Regulation (such as corporate bonds).  ESMA and EIOPA will also be tasked with developing guidelines on disclosing information in an electronic format.
• Marketing: Misleading marketing (against a backdrop of the rise in social media ‘finfluencers’) is a key focus area.  Among the planned changes are a requirement that investment firms put in place a policy on marketing communications and preferences.  The proposals also confirm that financial intermediaries will be fully responsible for how the marketing communication is used (such as where it is promoted by a ‘finfluencer’ via social media).
• Suitability and Appropriateness: Changes are proposed to suitability and appropriateness assessments. There will be a requirement to explain the purpose of those assessments to retail investors and to give them warnings on how the provision of inaccurate information could impact those assessments.  Portfolio diversification will be added to the list of points that product distributors will need to consider when looking at suitability.
• Pricing: ‘Value for money’ is also a key focus of the package, with the in-scope directives being refined / amended to strengthen rules on pricing processes.
• Costs: Costs will need to be presented in a standardised way, using standard terminology.
• Annual View: Under proposed changes to MiFID II and the IDD, retail clients would need to be given a clear annual view of the performance of their investment portfolio.
• Warnings: Mandatory risk warnings would be introduced for investment firms and insurance intermediaries and insurance undertakings that distribute insurance-based investment products.
• Life Insurance: A new ‘Insurance Product information Document’ would be introduced for life insurance policies without investment elements.

To ensure that the proposals are not disproportionate as regards more sophisticated retail investors, the Commission has also proposed adjusting the criteria by reference to which a retail client can ask to be treated as a professional client (for example by reducing the monetary threshold from €500,000 to €250,000).

We will publish further updates as the package moves through the EU legislative process.  In the meantime, to discuss any aspect of the Commission’s proposals in more detail, please get in touch with your usual contact in our Financial Regulation, Insurance or Asset Management and Investment Funds groups.

“Greater trust and confidence will encourage people to invest more in Europe’s capital markets; protecting consumers and treating them fairly. It will also help to keep Europe’s retail investment sector competitive. This is a key objective of the Capital Markets Union.”

https://ec.europa.eu/commission/presscorner/detail/en/ip_23_2868