A) EC new RIS legal package: “to protect and empower EU retail investors”

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

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

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Yesterday at 2pm, the European Commission (EC) finally unveiled their long-awaited Retail Investment Strategy (RIS) package of measures.  This 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.”

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

1. Problems with current EU legislative framework

The EC state the problems that prevent retail investors from taking full advantage of EU capital markets:

• Difficulties accessing relevant, comparable and easily understandable investment product information
• Growing risk of misleading marketing on social media and new marketing channels
• Shortcomings in the way products are designed and distributed: linked to potential conflicts of interest between manufacturers and distributors (e.g. inducement payments)
• Some products have “unjustifiably high costs” that “consequently do not always offer value for money to the retail investor”.

2. Proposed EU redress measures

The RIS package seeks to address the EC’s identified problems, in a variety of different ways:

• Modernise product disclosures: adapted to the digital age and investor sustainability preference
• New “value for money” benchmarks: against which financial products need to be assessed
• Address potential conflicts of interests: rules changes covering inducements (commission payments)
• Financial advice rules update: to ensure this better meets the needs of retail investors
• Marketing communication rules update: to ensure this is clear, fair, and not misleading
• Improve financial literacy: both retail investors and their financial advisors
• Revise investor categorisation: reforming the eligibility criteria for professional investors
• Strengthen cross border supervision and enforcement: to ensure EU rules are coherently applied

3. Legislative proposals and related documents

To meet their strategic objectives, the EC has published a challenging bundle of legislative proposals, including:

• EU ‘Omnibus’ Directive: covering EU retail investor protection rules (123 pages);
• EU PRIIPs: targeted amendments to modernise the key information document (17 pages);
• EC Impact assessment report: to accompany the draft legislation (325 pages).

The EC’s Retail Investment Strategy package is now open to public opinion until 20 July 2023.

All feedback received will be presented to the European Parliament and Council, with the aim of “feeding into the legislative debate”.  Responses can be viewed using the EC’s stakeholder feedback timeline.

The EU tripartite approval process faces disruption from the 2024 European Parliament elections.

In the meantime, the EU-RIS package will provoke intense scrutiny within the industry.

Here is a rundown of key interest areas within the EC’s draft legal documents.

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B) ‘Omnibus’ Directive: to strengthen retail investor protection rules

The first part of the EC’s RIS legal package is a draft “Omnibus” amending directive.

This large document contains proposed retail investor rule changes to five major EU Directives: UCITS, AIFMD, MiFID II, IDD and Solvency II.  Here are some of the EC’s more notable legal changes.

1. UCITS / AIFMD updates

a) Firms to administer ’Effective pricing process’

This will allow “identification & quantification of all costs borne” by the UCITS/AIF, to prevent ‘undue costs’ incurred by unitholders.

• A ‘Value for Money’ assessment is required at least annually to ensure:
• Costs are ‘not undue’ and
• Costs borne by retail investors are ‘justified and proportionate.’
• To be based on “objective criteria and methodology, including a comparison to market standards”
• Assessments are required before the authorisation, and throughout the life of the AIF / UCITS
• UCITS and AIF firms are obliged to reimburse investors, wherever “undue” costs have been charged.

NB: in the event of non-compliant ‘pricing process’: UCITS/AIFs “shall not be marketed”, unless an additional re-assessment is successful.

b) Reporting obligations to national competent authorities (NCAs)

For each fund managed, firms are required to provide to their home NCAs “information on the costs borne by investors and performance”. This is disclosed at fund or share class level (“where classes have different cost structures”). The new supervisory report will require tracking against “Value for Money benchmarks’, to enable a “comparative assessment” of UCITS and AIF products.

c) ESMA to develop ‘common benchmarks on costs and performance’

The European Securities and Markets Authority (ESMA) are mandated to take develop, publish and administer their Value benchmarks, including processing of data received from NCAs.

These may be similar to those ‘common benchmarks’ under development by EIOPA since 2021.

ESMA’s new benchmarks will display “a range of costs and performance, especially cases where costs and performance depart significantly from the average”.  They will cover individual cost components (including distribution) along with risk, strategy, objectives and other characteristics. The EC state this will help assist firms during their “comparative assessment” of the cost and performance of their products.

NB: In due course, ESMA will have 18 months to draft regulatory technical standards (RTS) covering:

• Content and type of data to be reported to EU regulators (based on disclosure and reporting obligations)
• Data standards and formats, methods and arrangements, information frequency and starting date

2. MiFID II updates

Media attention will likely focus on the EC’s plan not to apply a general ban on inducements; these will be restricted on an ‘execution-only’ basis (i.e. product sales without advice). Other regime changes include:

a) Client categorisation

Restrictions are eased for “sophisticated” retail investors to qualify as a ‘professional’.

b) Pre-contractual information on all costs, associated charges and third-party payments

Additional disclosure facing Investment firms, for provision to retail clients “in good time”, prior to investment service provision. ESMA will draft another RTS (within 18 months), covering specific relevant format, terminology and explanations.

c) Annual Retail Client Statement: Portfolio Costs & Performance

Investment firms will need to present, “…in an easy-to-understand way for an average retail client”:

• Total costs and associated charges paid or borne annually by the retail client (split where specified)
• Total amount of dividends, interest and other receipts;
• Total taxes, stamp duty, transactions tax, WHT (etc) borne by the retail client
• Market or estimated value of each financial instrument included in the retail client’s portfolio
• Net annual performance: total portfolio held by the retail client, plus each financial instrument
• Information to be expressed in monetary terms and percentages.

3. Insurance Disclosure Directive (IDD) updates

a) IDD Product Information Document

i.e. for life insurance products (except IBIPs). There will be a “new, user-friendly” pre-contractual document to disclose all costs, associated charges and third-party payments, as well as on their impact on expected returns.

b) Insurance-Based Investment Product Annual Statement

Manufacturers to draw up a “concise personalised document” containing key information to be provided annually to each retail customer.

EIOPA will have two years to develop:

• Digital disclosure specifications: presentation, format (incl. designs and channels used to inform retail customers).
• Guidelines: to assist insurance distributors to design information provided in an electronic format

4. MiFID II & IDD alignment updates

In an effort to further align MiFID II and IDD regimes, EC proposals include:

a) ‘Product approval process’

Ahead of client marketing / distribution, manufacturers are obliged to administer a formal process for the approval of each new financial instrument / insurance product (or significant changes to existing products).

NB: this includes formal alignment to PRIIPs costs and charges (i.e. “whether these are justified and proportionate”) and product performance (i.e. UCITS / AIFM ‘effective pricing process’ as outlined above).

b) Product Governance supervisory “value” reporting

MiFID and IDD entities facing retail clients must also report specific product details to their home NCA:

• Costs and charges details, including distribution costs and third-party payments;
• Performance and Risk level characteristics data

c) Common MiFID and IDD benchmarks

Similar to UCITS/AIFMD, this new NCA reporting needs to be tracked against publicly available ‘common benchmarks’ for financial instruments and insurance-based investment products, to be developed and made available by ESMA and EIOPA.

d) Annual reporting of cross-border activities

Each year, investment and insurance firms must submit additional information to their home NCAs, including:

• The type, scope and scale of services provided per EU member State
• The total number and the categories of clients per EU member State
• The number of complaints received from clients and interested parties per EU member State
• The type of marketing communications used in each host EU member State

NB: ESMA / EIOPA will have 18 months to draft the necessary RTS.

5. Solvency II updates

Finally, the following will be deleted from the Information for policy holders section of the S2 level 1:

• Article 183: General Information for Non-life insurance policy holders
• Article 184: Additional information in the case of non-life insurance
• Article 185: Information for Life insurance policy holders

NB: specific requirements on “modernised” pre / post-contractual information (covering these areas) have been moved to the IDD.

Once finalised and approved, the EC’s proposed RIS Omnibus Directive (covering all of the above EU regimes) 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.

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C) PRIIPs amended regulation: to modernise the key information document

The second part of the EU-RIS bundle is a proposed set of ‘targeted’ PRIIPs level 1 changes, said to “form a package strengthening retail investor protection with the Omnibus Directive, where both proposals mutually reinforce each other”.

1. PRIIPs KID amendments

a) PRIIPs KIDs scope to exclude:

• Various securities, c/o 2017 EU Prospectus Regulation [Art.1(2) points (b) to (e), (g)]
• Certain pension products: immediate annuities without a redemption phase
• Certain types of corporate bonds with ‘make-whole’ clauses

b) New legal definition: ‘electronic format’

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

• Fund firms provide “tools adapted to retail investors”: to facilitate research, comparison among the different investment options (including costs)
• Easy access to pre-contractual information documentation relating to the investment products backing the underlying investment options
• complete costs of the PRIIP relating to any investment option: provided in good time, upon request (before retail investors are legally bound)

d) New PRIIPs KID section: ‘Product at a glance’

To summarise and highlight respective information covering:

• Investment product type
• Costs
• Level of riskiness
• Recommended holding period
• Presence of insurance benefit

e) New PRIIPs KID section: ‘How environmentally sustainable is this product?’

For retail products that produce SFDR product pre-contractual disclosure:

• Minimum proportion of investment associated with economic activities that qualify as “environmentally sustainable”, c/o Taxonomy regulation (art. 5 and 6)
• Expected GHG gas emissions intensity associated with the PRIIP (pursuant to SFDR level 2)

f) Amended: What is this product?’ section

This no longer requires referral to specific environmental or social objectives, targeted by the product.

g) Removed: PRIIPs KID ‘comprehension alert’

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

 h) EU-PRIIPs KID: “modernised and simplified”

To follow example of the pan-European personal pension product (PEPP) document:

• Electronic format will be the default KID medium, unless the investor requests a paper version
• KID to be provided by means of an ‘interactive tool’, enabling investor to generate personalised key information based on the information in the PRIIPs KID or underlying information.
• Investors should be able to simulate costs over the recommended holding period
• Investors should also be allowed to compare different PRIIPs, online
• Functionalities will make information accessible to persons with disabilities (incl. the visually impaired)

NB: the EC also list the initial rules for any online interactive tool used by retail investors, including:

• They “shall not alter the understanding of the key information document”
• All key information will be presented
• Digital PRIIPs KID will be easily accessible, via interactive tool link
• Online message required: “It is recommended to download and store the key information document”.

2. Key PRIIPs L1 legal dates

Once finalised and adopted, these revised PRIIPs changes will:

• Enter into force: 20 days after EUOJ publication
• Legally apply: 18 months thereafter

In due course, the European Supervisory Authorities (ESAs) will draft several RTSs, required within one year:

• EU-PRIIPs KID template version 3 (covering points 1.c)-g) above)
• Conditions for digital PRIIPs KID, data layering, etc (per 1.h) above)
• Specific conditions under which the KID must be kept up to date (incl. PRIIPs no longer made available).

3. Other PRIIPs L1 dependencies

a) ESAP and access to digital PRIIPs KID data

Shortly before the RIS package was published, it was reported the EU institutions had reached an agreement on a legal proposal for a European Single Access Point (ESAP) regulation, published in November 2021.

The ESAP platform is now expected to become available from summer 2027, to be “phased in gradually, to allow robust implementation”.

The EC state their targeted PRIIPs proposals are “coherent and complementary” with the inclusion of the PRIIPs KIDs within scope of the new ESAP regulation. Their interim expectations are:

• ESAP will make the content of the PRIIPs KIDs available on a single platform
• ESAP will also improve access to, and the digital use of, information contained in PRIIPs KIDs
• Manufacturers will need to provide their KIDs in a data-extractable format, starting from end-2027.
• Depending on ESAP implementing measures, “this could make such information machine readable”.

The EC also expect ESAP to benefit retail investors: “by increasing access to online tools for comparing many different investment products (by making it easier for third parties to develop such tools)”.

However, retail investors and their advisors “will still need to read the content of the KID, whether on paper, or in electronic format, notably when assessing the characteristics of a specific investment product”.

b) ESAP and PRIIPs KID ex-ante notification

The EC made no referral (at this stage) to the ex-ante KID notification [art. 5(2)], despite prominent coverage within the ESA’s April 2022 PRIIPs review advice. The ESAs had previously cited:

• The EC’s original ESAP proposal “…will mean in the near future, KIDs will need to be collected”.
• PRIIP manufacturers: “will need to submit KIDs to a national collection body, which, in the majority of cases, it is understood will be the national competent authority (NCA)”.
• A “wider use” of ex-ante notification: “could be complementary to the preparatory work for the ESAP”
• “More generally, it will be important to consider further the interaction between an ex-ante notification to NCAs and the ESAP, as well as the overall consistency of the entire ruleset applicable to PRIIPs.”

c) Post-implementation objective monitoring

Once the revised PRIIPs L1 is adopted, the EC say they will monitor “how the proposed regulation achieves the specific objectives” of the retail investment strategy, set out in their separate ‘Impact Assessment’ report.

For the PRIIPs regime, this will include:

• ESMA and EIOPA will be tasked to monitor the effectiveness of displaying information in a digital format, of introducing a new sustainability section, and new multi-option product (MOP) rules.
• The EC will assess the quality of information available, by monitoring the ESMA/EIOPA complaint levels.
• At an appropriate stage, the EC plans to evaluate the role of disclosure documents in enabling investors to take well-informed investment decisions “and could consider potential further amendments to the broader PRIIPs framework”.

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