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EU strategy for retail investors

In “An Economy that Works for People”

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On 24 September 2020 the Commission adopted a new Capital Markets Union (CMU) Action Plan. Action 8 'Building retail investors' trust in capital markets', part of the second objective of the CMU Action Plan 'Make the EU an even safer place for individuals to save and invest long-term', is aimed at ensuring confidence and trust of retail investors in capital markets. The objective is to raise retail financing of the economy.

The main areas the strategy would touch upon are:

  • Inducements and disclosures
  • Categorisation of investors
  • New requirements for advisors

In its advice on the retail investor protection of 29 April 2022, the European Insurance and Occupational Pension Authority (EIOPA) reports the following main findings.

  1. Disclosure, including digital disclosure, could enhance consumer engagement. It recommends 'the idea of developing an annual statement to be disclosed to policyholders';
  2. Highlights the risks and opportunities created by new digital tools and channels;
  3. Conflicts of interest in the sales process need to be tackled throughout the lifecycle of a product;
  4. Clarity on the scope of the 'demands and needs' test and suitability assessment could promote affordable and efficient sales process;
  5. The regulatory framework to identify product complexity could be more coherent.

On 24 May 2023, the Commission proposed an omnibusdirective, which would amend the following directives regarding EU retail investor protection rules:

  • Directive 2009/65/EC on the coordination of laws, regulations and administrative 
    provisions relating to undertakings for collective investment in transferable securities 
    (UCITS);
  • Directive 2009/138/EC on the taking-up and pursuit of the business of insurance and 
    reinsurance (Solvency II);
  • Directive 2011/61/EU on Alternative Investment Fund Managers (AIFM);
  • Directive 2014/65/EU on Markets in Financial Instruments (MiFID);
  • Directive 2016/97 on Insurance Distribution (IDD).

The second proposed regulation would amend Regulation (EU) 1286/2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs) as regards the modernisation of the key information document (KID). 

The European Economic and Social Committee (EESC) adopted an Opinion on 25 October 2023. The EESC welcomes the statements that there are potential conflicts of interest in the sales and distribution models for investment products, and points out that there is already an independent advice gap for some consumers. It also welcomes the Commission proposal to align ongoing training requirements under IDD to MiFID and codify the related European Securities and Markets Authority (ESMA) Guidelines.

In Parliament, the file referral to the Committee on Economic and Monetary Affairs (ECON) was announced on 10 July 2023. The rapporteur published her draft reports on the package of proposals on 4 October 2023. The drafts suggested the removal of the partial ban on inducements for execution-only services. Amendments to MiFID would also clarify the concept of 'cost-efficiency' as regards the 'best-interest test'. Amendments to IDD provide that financial advice would be given on the basis of 'the performance, level of risk, costs, charges of an insurance based investment product or, where applicable underlying investment options'. When it comes to 'finfluencers', it proposes additional elements to ensure 'clear, fair and no misleading marketing communications and to address concerns'. The provision regarding the 'procedure to address unauthorised activities offered through digital means' is extended to finfluencers using 'mis-selling practices'.

The committee reports adopted in ECON on 20 March 2024 follow the draft reports, adding missing amendments regarding  benchmarking. The report provides that ESMA, 'on the basis of industry testing and after consulting EIOPA and the national competent authorities', would develop common EU benchmarks for groups of comparable financial instruments 'manufactured and distributed in more than one Member State'. This benchmark would serve the 'sole purpose of a supervisory tool', which would allow for 'outliers' to be identified among all instruments in an asset class. However, manufacturers of outlying products would
need to justify the deviations and implement necessary corrections if justification is insufficient.

As regards finfluencers, the investment firm would have to provide the finfluencers' identity and contact information to competent authorities.

The report also strengthens the financial education, whereby 'Member States would define and implement informational and educational actions in order to promote and increase consumers' education and knowledge'. Moreover, the European Commission would establish a 'Platform on financial education and literacy' whose purpose is to facilitate cooperation and exchange of best practice among Member States.

The vote in Committe took place on 20 March 2024, and the text was voted in Plenary in the April II session.

In its position published on 19 June 2024, the Council decided to remove the proposed ban on ’inducements’ received for execution-only sales, and strengthen the safeguards with additional rules. It also introduces 'overarching principles', which are not part of the inducement test as such. It also introduces a new concept of 'Value for Money' to ensure that investment products are offered to retail clients only if they offer good value for money. The Council agreed that the European supervisory authorities European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pensions Authority (EIOPA) would develop Union supervisory benchmarks.

References:

Further reading:

European Parliament, EPRS, Retail investor package, Briefing, September 2023.

Author: Issam Hallak, Members' Research Service, legislative-train@europarl.europa.eu

As of 20/09/2024.