Retail Investment Package: the European Commission wants retail investors to take full advantage of capital markets

A first set of changes addresses the regulatory disclosure framework, more specifically the disclosure on information relating to risky products and costs, charges and third party payments:

1. investment firms, insurance intermediaries and insurance undertakings distributing insurance-based investment products (IBIPs) will have to display appropriate risk warnings on all information materials relating to particularly risky products. National competent authorities, ESMA and EIOPA will have the power to impose the use of risk warnings for particularly risky products;
    
2. the disclosure of information by investment firms, insurance intermediaries and insurance undertakings distributing IBIPs to retail investors regarding costs, associated charges and third party payments will need to be presented in a standardised  manner. Specifically on third-party payments, an explanation in a standardised and comprehensible way of their purpose and quantification of their impact on expected returns will be required. Retail clients and customers will also need to be provided with an annual statement providing, among other things, information on costs and charges, including third party payments, and performance.

Secondly, the Package introduces various measures regulating marketing communications and practices to tackle the issue of misleading and unbalanced marketing communications.

Unbalanced marketing communications that highlight the benefits but minimise the risks are detrimental for retail investors. Investment firms will therefore have to develop a specific policy on marketing communications and practices and will need to have effective organisational and administrative arrangements in place to ensure compliance with all obligations related to marketing communications and practices. In addition, marketing communications will need to be tailored to and used for the identified target market only.

Further, marketing communication issued by investment firms, insurance intermediaries and insurance undertakings distributing IBIPs will have to:

1. be clearly identified as such;
    
2. be appropriately attributed to the investment firm, insurance intermediary or insurance undertaking by which or on whose behalf they are made,;
    
3. contain the essential characteristics of the investment product or service; and 
    
4. should be fair, clear and not misleading, present the risks and benefits in a balanced way and be appropriate for the target group of investors they are aimed at.

The existing record keeping obligation will also be extended to all marketing communications which are directly or indirectly made by investment firms, insurance undertakings and insurance intermediaries.

The existing bans on inducements regarding independent investment advice and portfolio management are supplemented with a ban on inducements paid by manufacturers to distributors in relation to so-called execution-only sales (reception and transmission of orders and execution of orders).

With regard to IBIPs, a similar ban is introduced on inducements paid from manufacturers to distributors in relation to non-advised sales of IBIPs, and similar to what already exists for investment advice, a differentiation between independent and non-independent advice relating to IBIPs is proposed.

The obligation for investment firms, insurance undertakings and insurance intermediaries to act in accordance with the best interest of their clients and customers will be reinforced by replacing the current ’quality enhancement’ test of MiFID II and the ‘no detriment’ test of IDD by a new ‘best interest’ test which will require financial advisors to:

1. provide their advice on the basis of an assessment of an appropriate range of financial instruments;
    
2. recommend the most cost-efficient financial instruments among the suitable instruments for the client; and
    
3. offer at least one suitable financial product without additional features that are not necessary to the achievements of the client’s investment objectives and that give rise to additional costs;

In addition, insurance undertakings and insurance intermediaries distributing IBIPs must ensure that the insurance cover included in the product is consistent with the customer’s insurance demands and needs.

With a view to limiting the offer of products that bear poor or no ‘value for money’ for investors, the existing product governance frameworks are complemented by new requirements on manufacturers to set out a pricing process allowing for the identification and quantification of all costs and charges, and an assessment of whether such costs and charges do not undermine the value which is expected to be brought by the product.

In relation to PRIIPs, UCITS and AIFs, the pricing process is strengthened to better account for costs and charges, including a requirement not to approve products that deviate from a relevant benchmark, serving as a tool of comparison, unless the manufacturer is able to establish that the costs and charges are justified and proportionate. Cost and performance benchmarks will be developed by ESMA and EIOPA and based on mandatory reporting by manufacturers and national competent authorities.

Similarly, distributors will also need to quantify distribution costs and perform an overall price assessment against relevant cost and performance benchmarks, taking into account manufacturers’ own assessments.

Further amendments to UCITSD and AIFMD are proposed to avoid undue costs by defining the conditions for considering that costs are due and providing rules in the pricing process to ensure that these conditions are met.

The Package aims to ensure that suitability and appropriateness assessments are sufficiently adapted to retail investors’ needs.

Prior to requesting any information from their clients and customers, investment firms, insurance undertakings and insurance intermediaries will need to explain the purpose of the suitability or appropriateness assessment to be made, and the clients and customers must be warned of the negative consequences resulting from the provision of inaccurate or incomplete information, or from the absence of information.

The need for portfolio diversification will also be included in the suitability assessment. Quite noteworthy is also the Commission’s proposal, with the aim of encouraging independent and cheaper investment advice, to loosen the suitability assessment for diversified, non-complex and cost-efficient products by no longer requiring an assessment of the knowledge and experience of clients, nor will their need for portfolio diversification have to be assessed.

The appropriateness assessment, which replaces the suitability assessment when non-advised services are provided, would on the other hand be strengthened by requiring an assessment of the retail client’s or the customer' capacity to bear full or partial losses and risk tolerance.

The Package proposes to strengthen the requirements on the knowledge and competence of investment advisors and harmonise them across MiFID II and IDD. Compliance will need to be proven by a certificate.

To ensure a more appropriate classification of clients and reduce administrative burdens, the criteria that retail clients must meet in order to request treatment as a professional client are eased: the wealth criterion is reduced from EUR 500 000 to EUR 250 000, and a possible fourth criterion relating to relevant education or training is inserted. Legal entities will be able to qualify as professional client on request if they meet certain balance sheet, net turnover and own funds criteria.

The Package finally proposes some targeted amendments to the PRIIPs Regulation such as excluding retail products providing immediate annuities without a redemption phase and certain types of corporate bonds with make-whole clauses from its scope, and introducing a ‘Product at a glance’ section and a new dedicated sustainability section in the PRIIPs KID.

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