Implications for Irish Funds

The European Commission published its ambitious Retail Investment Strategy (“RIS”) on 24 May 2023.

Building on the 2020 Capital Markets Union action plan, the RIS introduces a series of proposed legal and regulatory measures designed to promote retail investor participation and strengthen consumer trust.

The RIS package aims to place consumers’ interests at the centre of retail investing. Its aim is to empower retail investors (i.e. “consumer” investors) to make investment decisions that are aligned with their needs and preferences, ensuring that they are treated fairly and are duly protected. This is intended to enhance retail investors’ trust and confidence to safely invest and take full advantage of the EU’s Capital Markets Union.

The RIS package includes a proposal for an Omnibus Directive amending the UCITS Directive and AIFMD, among others. An FAQ document has also been published which can be viewed here.

For further information on the RIS generally, please see our AC Insights post here.

Some of the most significant implications for Irish funds and fund management companies (“FMCs”) arising from the RIS are set out below, together with responses from industry.

Value for Money and Prevention of Undue Costs

Following on from recent regulatory activity by the European Securities and Markets Authority (“ESMA”),  the EU’s financial markets regulator and supervisor, and National Competent Authorities in this area, the Commission has sought to consolidate an effective pricing process for FMCs by updating the UCITS and AIFMD frameworks to ensure that costs associated with funds and investment products are not undue and are justified and proportionate having regard to the relevant fund’s characteristics.

The RIS will require FMCs to assess whether undue costs have been charged to investors and to subsequently report on this to their National Competent Authority. In addition, distributors will be obliged to quantify the costs not already considered by the FMC or manufacturer. Most significantly, the RIS aims to compel FMCs to compensate investors where undue costs have been charged.

Benchmarking

It is proposed that UCITS and AIFs that are marketed to retail investors will be required to carry out objective cost assessments comparing the product with a benchmark based on supervisory data which will be considered as market standard. Accordingly, it is proposed to amend the UCITS Directive and AIFMD to outline the conditions for determining which costs are legitimate and to provide rules on the pricing process. These criteria will be embedded into the existing “Level 2” measures under each Directive.

It is also proposed to task ESMA with producing and updating publicly available value for money benchmarks. FMCs will be required to make submissions to their National Competent Authority setting out the costs borne by investors and the relevant fund performance. Deviations from the value for money benchmarks will require FMCs to conduct additional testing to establish whether the costs are justified and proportionate.

Proposed Changes to the PRIIPS KID

As part of the RIS, the Commission proposes to amend the Packaged Retail and Insurance-Based Investment Products (“PRIIPs”) Regulation. The proposed changes impact the contents of the Key Information Document (“KID”) which must be provided to retail investors before they invest in a PRIIP, which includes investment funds, and contain proposals to:

• introduce new sections in the KID which will use dashboards;
• provide investors with key ESG information on the sustainability aspects of products subject to SFDR (including the minimum proportion of the PRIIP’s investment associated with sustainable economic activities under the Taxonomy Regulation);
• summarise information about the total costs of the PRIIP and the summary risk indicator;
• mandate electronic disclosure (unless an investor has requested to receive a paper version); and
• specify how layering can be used in the digital provision of a KID.

Industry Response

Aspects of the RIS were initially welcomed by the European Fund and Asset Management Association (“EFAMA”), including the digital-by-default disclosures, the preservation of both fee- and commission-based distribution models, and comparable rules for all types of investment products.

However, concerns appear to be growing about some of the RIS proposals. On 6 June 2023, a joint industry statement was issued by EU financial services trade associations, including EFAMA, outlining concerns around issues including the timeline for implementation, restrictions on commissions, introduction of value for money benchmarks and complexity of disclosure and other requirements. These concerns can be summarised as follows:

• many of the prohibitions to the payment of commissions in the RIS proposals would have major disruptive consequences for the European financial sector and consumers’ access to investment and insurance protection;
• the proposed “best interest of the client” test, which disproportionately focuses on costs, may lead clients to prioritise the “cheapest” product over others that could potentially offer them greater value – such an outcome would be, in fact, contrary to the client’s best interest;
• the significant number of new processes, policies, organisational requirements, technical disclosures and compliance obligations introduced by the proposals deviates from the stated goals of i) reducing the information overload on clients, and ii) making access to financial services simpler – in fact, the complexities would discourage consumer engagement and investment;
• the proposed introduction of one-size-fits-all, quantitative “value for money” benchmarks contradicts the core goal of the investment process, which is to offer tailored solutions to different clients’ needs – value encompasses more than just costs and has diverse meanings for different consumers, depending on their circumstances, objectives and personal values; and
• the timeline for implementation is unfeasible. Industry needs adequate time to apply any new requirements and all necessary Level 2 specifications and national provisions should be published in advance of the implementation date.

The European Commission invited stakeholders and interested parties to submit their feedback on the proposals until 28 August 2023. The European Commission’s proposals will now need to go through the legislative process with the European Parliament and the Council of the European Union before approval.

If you require further information on the RIS, please contact any member of our team or your usual Arthur Cox contact.