Explanatory Memorandum to COM(2023)278 - Amendment of Regulation (EU) No 1286/2014 as regards the modernisation of the key information document - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2023)278 - Amendment of Regulation (EU) No 1286/2014 as regards the modernisation of the key information document. |
|---|---|
| source | COM(2023)278 |
| date | 24-05-2023 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
In line with the Commission’s objective of ‘an economy that works for people’, and as announced in the 2023 work programme, the Commission is seeking to ensure that the legal framework for retail investments sufficiently empowers consumers, encourages improved and fairer market outcomes, and ultimately creates the necessary conditions to grow retail investors’ participation in capital markets.
In its September 2020 new Capital Markets Union Markets Union action plan1, the European Commission announced its intention to put forward a strategy for retail investments in Europe aimed at ensuring that retail investors can take full advantage of capital markets and are supported by rules that are coherent across all relevant legal instruments.
A core objective of the Capital Markets Union (CMU) is to ensure that consumers can fully benefit from the investment opportunities offered by capital markets. While retail participation in the capital markets varies widely across Member States, reflecting different historical and socio-economic conditions, retail investors should be able to achieve better investment outcomes than is currently the case when participating in EU capital markets.
Contents
On 3 December 2020, in the Council Conclusions on the Commission’s CMU Action Plan2, the Council called on the Commission to initiate implementation of the parts of the action plan that aim to boost investment activity, particularly by retail investors inside the EU, while ensuring a high level of consumer and investor protection.
On 8 October 2020, the European Parliament adopted a www.europarl.europa.eu/doceo/document">Resolution on the further development of the Capital Markets Union3 that was largely supportive of measures to increase retail investor participation in capital markets. The Resolution emphasised that increased retail investor participation is contingent on a change in investment culture, and such a change could only come into effect when retail investors become convinced that investing in capital markets is desirable while being subject to acceptable and clearly defined risks.
This proposal amends Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (‘PRIIPs’). The entry into force of the PRIIPs Regulation and the Commission Delegated Regulation (EU) 2017/653 on 1 January 2018 has helped improve and standardise the information provided to retail investors. This has made it easier for investors to understand key features of a full range of investment products and to compare different products including those of different product type (such as insurance-based investment products, investment funds or structured deposits). As of January 2023, PRIIPs started to apply to investment funds under the scope of Directive 2009/65/EC on undertakings for collective investment in transferable securities (the UCITS directive), as the previous exemption had ceased to apply. This has further increased the consistency of disclosures across retail investment products.
This proposal for targeted amendments to the PRIIPs legal framework is included in the EU Retail investment strategy, in line with Action 8 of the September 2020 CMU action plan. Regarding disclosures, the EU retail investment strategy aims to improve information for investors and their ability to take well-informed investment decisions. To that end, this proposal aims to adapt disclosures to the digital environment and to the evolving needs of retail investors, and to provide further clarity on the scope of PRIIPs with regards to corporate bonds with make-whole clauses and immediate annuities. This initiative is not part of the Regulatory Fitness programme (REFIT).
• Consistency with existing policy provisions in the policy area
This initiative builds upon, and improves, existing rules that govern the provision of PRIIPs key information documents (PRIIPs KIDs) to retail investors by manufacturers and distributors of investment products. It involves targeted changes to this framework, keeping the main provisions intact.
This proposal forms a package strengthening retail investor protection with the Omnibus directive (COM(2023) 279), where both proposals mutually reinforce each other. The Omnibus directive amends the EU directives governing: i) the provision of investment services (‘MiFID’4); ii) the provision of insurance or reinsurance distribution services to third parties (‘IDD’5); iii) the take-up and pursuit of insurance business within the EU (‘Solvency II’6); iv) the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (‘UCITS’7); and v) Alternative Investment Fund Managers (‘AIFMD’8).
With regards to disclosures for retail investors, the Omnibus directive will notably improve the coherence of disclosures across legal instruments and promote more transparency to retail investors across their investment journey and the investment life cycle, including on costs. Targeted amendments in the MiFID II and IDD frameworks would ensure that costs of investment products are presented in a standardised and easy-to-understand format, before the execution of any transaction. These measures would also reinforce firms’ obligations to provide an annual statement to clients, informing them ex-post on costs actually paid but also on the performance of their portfolio.
The measures on product disclosure proposed in this Regulation also complement other measures in the Omnibus directive, which tackle shortcomings in different parts of the retail investor journey:
New rules aimed at protecting retail investors from misleading marketing communications and practices which emphasise benefits but downplay the potential risks;
Rules prohibiting inducements in execution-only cases and tackling bias in the advice process by strengthening the best interest principle and introducing new criteria for “acting in the best interest of the client” as well as improving transparency;
Measures amending product oversight and governance rules to ensure that undue costs are not charged, and products deliver value for money to retail investors;
and further measures on financial literacy, investor categorisation, enhanced suitability and appropriateness assessments, measures to increase professional qualifications of financial advisors and measures to enhance supervisory enforcement.
Measures included in the retail investment strategy are hence consistent with the targeted changes to PRIIPs KIDs.
This proposal is consistent with existing EU policies on sustainable finance. The introduction of a new dedicated section in the PRIIPs key investment document focused on sustainability complements the sustainable finance disclosure framework. It builds on data already disclosed under the Sustainable Finance Disclosure Regulation (EU) 2019/2088 (SFDR) and the Taxonomy Regulation (EU) 2020/852 in order to avoid duplications and unnecessary costs for the financial sector. The PRIIPs framework will be kept consistent with the potential future changes to SFDR and EU Taxonomy. To allow this, this proposal leaves specifications for the calculation and presentation of the selected indicators for regulatory technical standards to be developed by the ESAs. This is important notably as the Commission services have launched a comprehensive assessment of the implementation of SFDR.
The proposed targeted changes are considered coherent and complementary with the inclusion of the PRIIPs KIDs in the scope of the Regulation on a European Single Access Point (ESAP). Pending the outcome of the negotiations on the Commission’s proposal9, ESAP would make the content of the PRIIPs KIDs available on a single platform and would require that they are provided in a data-extractable format starting from end 2027. Depending on the implementing measures adopted through implementing acts, this could make such information machine readable. While ESAP will improve access to, and the digital use of, information contained in PRIIPs KIDs by requiring that they are submitted to ESAP in a data extractable format, targeted changes proposed now would make this information more reader-friendly. ESAP is expected to benefit retail investors mainly by increasing access to online tools for comparing many different investment products (by making it easier for third parties to develop such tools). Retail investors and their advisors however 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. Therefore, in parallel to making this information available on ESAP, it is relevant to make the document more user-friendly. The changes introduced in this Regulation also aim to achieve greater consistency on the digital presentation of key information on investment products, following the example of a similar document introduced under the Regulation (EU) 2019/1238 on a pan-European personal pension product (PEPP).
• Consistency with other Union policies
This proposal is consistent with broader EU strategies and priorities including the European Green Deal, the EU’s digital strategy and the Capital Markets Union. It contributes to the objectives of the Capital Markets Union by increasing the consistency of information available to retail investors. By making relevant sustainability information more visible, it will help retail investors to find investment products matching their sustainability preferences. This would in turn contribute to mainstreaming sustainability in the financial sector and thus help achieve the objectives of the European Green Deal. Moreover, this proposal is consistent with the Commission’s priority of making Europe Fit for the Digital Age.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
The legal basis for the PRIIPs Regulation is Article 114 of the TFEU, as it establishes common rules on key information documents for packaged retail and insurance-based investment products. Considering that the current initiative proposes further policy actions to ensure the achievement of these objectives, the related legislative proposal would be adopted under the same legal basis.
• Subsidiarity (for non-exclusive competence)
This proposal complies with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union (TEU). According to this principle, action should only be taken at EU level if the aims cannot be achieved by Member States acting alone. To avoid barriers to the distribution of investment funds across the EU, product information needs to be harmonised to enable comparison between products originating from different markets. Uniformity and legal certainty can be better ensured by acting at EU level. This applies to both the existing PRIIPs Regulation itself and to its amendments proposed here.
• Proportionality
This proposal complies with the principle of proportionality as set out in Article 5 TEU. The proposed measures are necessary to achieve the objectives of transparency of investment products for retail investors, notably on their sustainability characteristics, and making related disclosures more accessible through digital means without introducing unnecessary administrative burdens. Other parts of this proposal are necessary to provide sufficient legal clarity and transparency on costs for certain products within the scope of the PRIIPs Regulation. The proportionality of the measures was assessed in Section 3 of the impact assessment report accompanying the retail investment strategy with the conclusion that they are proportionate.
• Choice of the instrument
As the existing legal instrument is a regulation, a regulation is needed to amend it. A regulation continues to be the most appropriate legal instrument, considering the need to ensure the consistency and coherence of information available to retail investors at EU level.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Ex-post evaluations/fitness checks of existing legislation
The annex to the accompanying impact assessment contains an evaluation of the aspects of the legislative framework specifically relating to protection of retail investors including the PRIIPs framework.
The evaluation concluded that the overall disclosure framework, including PRIIPs, has been broadly effective, notably in providing information to retail investors that is comparable and useful for their decision-making. Nevertheless, some shortcomings were identified in terms of the readability and user-friendliness of the presentation of information documents. Information on costs is also not always clear. The efficiency (cost-effectiveness) of existing disclosure requirements is high, having broadly achieved the objective of increasing retail investor protection at limited costs. This proposal provides greater legal clarity on the scope of PRIIPs, addressing the challenges identified in the evaluation (i.e. whether corporate bonds with make-whole clauses and immediate annuities are included in the scope of PRIIPs). Requirements on the format, readability, clarity, conciseness, language use and comprehensive coverage are considered coherent between the different pieces of legislations. Some specific issues are addressed in the proposed Omnibus Directive which aims to better align MiFID and IDD rules with PRIIPs. The relevance of information provided to retail investors in PRIIPs key information documents could be improved, in particular considering the need to place greater emphasis on the digital environment and sustainability.
• Stakeholder consultations
To help prepare this proposal, the Commission gathered feedback by means of a public consultation which took place between 11 May 2021 and 3 August 2021. The consultation sought the views of a broad range of stakeholders on various aspects of retail investments, including on the functioning of and possible improvements to the PRIIPs KID. In total, 186 respondents replied to this consultation.
A majority of respondents agreed that pre-contractual disclosures should enable as far as possible a clear comparison between different investment products. Views were split on whether the PRIIPs KID has improved retail investors’ level of understanding of retail investment products and their ability to compare different retail investment products, both within and across different product types.
Almost half of the respondents considered that amount of information provided in the PRIIPs KID to be adequate, with others indicating that it was either too much or too little. Views differed by type of information and stakeholder, but sustainability-related information stood out as an area where more information was desirable. Regarding the length of the PRIIPs KID, there was overall support for the current maximum length of three pages, with some variation between stakeholder groups. There was a broad agreement that the PRIIPs KID is somewhat overloaded with information and most respondents were in favour of simplifying it. A strong majority was against more frequent updates of PRIIPs KIDs. Finally, almost half of respondents considered that retail investors could easily find and access PRIIPs KIDs.
• Collection and use of expertise
The recommendations of the Joint Committee of the European Supervisory Authorities (ESAs) on PRIIPs focused on making KIDs more consumer friendly. The ESAs recommended targeted changes to the PRIIPs Regulation as part of a review of the PRIIPs framework.
In particular, the Joint Committee recommended: i) improving the presentation of the KID on digital media and providing more flexibility on their digital presentation; ii) Allowing a more visible presentation of environmental, social and governance (‘ESG’) information in the KID through a separate section; iii) providing more specific cost information for insurance multi-option products; iv) incorporating more flexibility into the KID, including by allowing different types of performance information depending on the product type; v) making KIDs more tailored to specific product types; and vi) clarifying and tweaking the product scope of the PRIIPs Regulation by making it clear that certain corporate bonds are excluded.
Annex 2 of the accompanying impact assessment lists additional sources considered when preparing this proposal, including targeted stakeholder consultations and outreach. The Commission also relied on extensive research literature, which is referenced in the impact assessment, in particular a specially commissioned study carried out by a consortium of consultants led by Kantar, titled ‘Disclosure, inducements, and suitability rules for retail investors study’, published in 202210.
At an earlier stage, the preparation of this proposal also benefited from the advice of the CMU High-level forum (‘CMU HLF’), which recommended revisiting disclosures under the PRIIPs framework at an appropriate time. Input was also provided by the Government Expert Group on Retail Financial Services (GEGRFS) and the Financial Services User Group (FUSG)11.
• Impact assessment
This proposal has been informed by the Impact assessment on the retail investment strategy (SWD(2023) 278-279). The Impact Assessment was submitted to the Regulatory Scrutiny Board (‘RSB’) on 14 December 2022 and received a positive opinion on 20 January 2023 (SEC(2023) 330 RSB). It was subsequently amended to reflect the consultation with the RSB.
Two problems are explored in the Impact Assessment. First, retail investors lack relevant, comparable and easily understandable information on investment products and are often inappropriately influenced by marketing communications. Second, there are major shortcomings in the investment product manufacturing and distribution process related to the payment of inducements and the extent to which product design reflects cost-efficiency and value for the retail investor. These problems have significant consequences, including insufficient protection and unfair treatment of investors, reduced investment returns and ability to accumulate capital and negative effects on retail investors’ confidence and market integration.
Targeted changes to the PRIIPs KID form a part of the proposed solutions to address the first problem and its driver (‘the information provided to investors is not always useful or relevant for their decision-making process and it is not sufficiently adapted for the digital environment’). These are included under Option 2 - ‘Targeted changes to disclosure rules to improve their relevance for retail investors’, together with targeted amendments to disclosure rules under MiFID and IDD focused on improving the relevance of disclosures for retail investors (included in the accompanying Omnibus Directive). An additional further policy option was considered under Option 3 - ‘Targeted changes to address informational deficiencies relating to marketing communications’. Options 2 and 3 are complementary and constitute an improvement compared to the status quo at a reasonable cost. A combination of both was therefore both included in the preferred option.
The impact assessment concludes that improving the presentation of the PRIIPs KID through the use of layering and the development of a summary dashboard would make it easier for retail investors to understand key characteristics of the investment product they are considering (e.g. its costs and risk level) and help them choose a product that matches their needs. The introduction of a new sustainability section would ensure that retail clients can clearly identify and easily compare basic information on the sustainability characteristics of the products they consider buying.
• Regulatory fitness and simplification
While the potential for simplification and burden reduction has been considered in the preparation of this proposal, its primary objective as well as that of the wider Retail investment strategy is consumer protection. Any simplification or burden reduction measures therefore needs to be considered from the perspective of this objective. The evaluation has not identified significant scope for simplification and burden reduction and suggested that simplification of PRIIPs key information documents would not necessarily make investment products more understandable. Moreover, the overall costs of product disclosures in PRIIPs were identified to be relatively low, especially when compared to the large number of clients and scale of assets under management. No significant impact is expected for SMEs and the proposal is consistent with the “digital check” as it encourages greater use of PRIIPs in electronic format.
• Fundamental rights
The proposal observes and respects the principles set out in the Charter of Fundamental Rights of the European Union, in particular the principle on a high level of consumer protection for all EU citizens (Article 38). Consumers, in this case retail investors, need relevant, comparable and easily understandable information about investment products in order to make well-informed decisions. This proposal modernises PRIIPs KIDs in order to make the presentation of information more user-friendly for retail investors, including people with disabilities, thus increasing the likelihood that it is read and correctly understood.
4. BUDGETARY IMPLICATIONS
The initiative does not have an impact on the EU budget. Supervision of the new rules would be handled by the National Competent Authorities under their existing mandates and its scope is not changed by this proposal.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
The Commission will monitor how the proposed regulation, once adopted, achieves the objectives set out in the Impact assessment accompanying the retail investment strategy. To this end, it aims to task the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA) with monitoring the effectiveness of displaying information in a digital format, of introducing a new sustainability section and new rules for multi-option products (MOPs). The Commission also plans to monitor trends in the number of complaints submitted through the ESMA and EIOPA market monitoring to assess the quality of information available. At an appropriate stage, allowing for enough practical experience and data to be gathered, including with the application of the recently amended PRIIPs Delegated Regulation12, the Commission 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.
• Detailed explanation of the specific provisions of the proposal
Article 1(1)(a) updates the legal references to the existing legislation (now Regulation 2017/1129 – ‘the Prospectus Regulation’) for the types of securities that do not have to produce a PRIIPs KID.
Article 1(1)(b) excludes retail products providing immediate annuities without a redemption phase from the scope of the PRIIPs Regulation.
Article 1(2) updates references to Regulation 2017/1129 (the Prospectus Regulation) to ensure that both regulations apply to relevant products.
Article 1(3)(a) clarifies that certain types of corporate bonds with make-whole causes are out of the scope of the PRIIPs Regulation provided that they are redeemed at a fair value.
Article 1(3)(b) introduces a definition of electronic format.
Article 1 i amends the rules for presenting costs of multi-option products (‘MOPs’), specifying the conditions that have to be met in order to provide transparent information to retail investors and facilitate choice between different investment options.
Article 1(5)(a) introduces a new section in the PRIIPs KID titled ‘Product at a glance’ to summarise and highlight the information on an investment product type, its costs and the level of riskiness, recommended holding period and presence of insurance benefit.
Article 1(5)(b) removes the ‘comprehension alert’ as it has not been sufficiently effective in warning retail investors against particularly complex products and could have also unintentionally discouraged them from purchasing less complex investment products.
Article 1(5)(c) removes a reference to environmental and social objectives pursued by the investment product, which is replaced by a new dedicated sustainability section in the PRIIPs key information document.
Article 1(5)(d) introduces a new section in the PRIIPs KIDs titled ’How environmentally sustainable is this product?’ (‘sustainability section) to provide retail investors with a harmonised set of key information on the sustainability profile of relevant investment products, building on existing product disclosures.
Article 1(5)(e) deletes an empowerment for the Commission to adopt delegated acts following the replacement of a reference to environmental and social objectives by the sustainability section. The new sustainability section would be specified through Regulatory Technical Standards, for which the empowerment already exists.
Article 1(5)(f) amends the timing of submission of applicable draft regulatory technical standards to the Commission.
Article 1(6) adds a condition for the ESAs to consider situations where PRIIPs KIDs are no longer made available and amends the timing of submission of applicable draft regulatory technical standards to the Commission. It also delegates power to the Commission to adopt related regulatory technical standards.
Article 1(7) modernises and simplifies the provisions on making PRIIPs KIDs available. It establishes a stronger preference for KIDs to be provided in electronic format, while clarifying that the client may request a paper version of the PRIIPS KID free of charge. It updates the provisions making PRIIPs KIDs available in electronic format, building on established practices from MiFID and IDD frameworks. It further specifies conditions for the use of layering and personalisation to provide greater legal clarity on the possibilities of using digital presentation of PRIIPs KIDs. It tasks the ESAs with the development of draft regulatory technical standards specifying the conditions for such presentation as well as the functionalities to make information accessible to visually impaired readers.
Article 2 provides that entry into force and application should occur on the twentieth day following that of publication and sets the date of application at 18 months thereafter, in order to allow sufficient time for the development of Regulatory Technical Standards.