97 as regards the Union retail investor protection rules - Main contents

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dossier	COM(2023)279 - Amendment of Directives (EU) 2009/65/EC, 2009/138/EC, 2011/61/EU, 2014/65/EU and (EU) 2016/97 as regards the Union retail ...
source	COM(2023)279
date	24-05-2023

1. CONTEXT OF THE PROPOSAL

• Reasons for and objectives of the proposal

In line with the European 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 investor participation in capital markets.

In its September 2020 new Capital Markets Union action plan ¹, the 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 that they are supported by rules that are coherent across all relevant legal instruments.

The 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 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.

This goal is shared by the co-legislators:
The impact assessment has been revised to address the comments of the RSB. The main improvements can be summarised as follows:
The proposed Directive improves regulatory fitness and simplifies the framework as follows:

1. This goal is shared by the co-legislators:

- On 3 December 2020, in its 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 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 that 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.

The Commission has concerns that capital markets do not sufficiently serve the long-term financing needs of EU citizens, who are often too heavily reliant on low-yielding savings. The Commission has identified a number of significant problems along the retail investor journey which diminish the ability of retail investors to take full advantage of capital markets: i retail investors have difficulties accessing relevant, comparable and easily understandable investment product information to help them make informed investment choices; (2) retail investors are exposed to a growing risk of being inappropriately influenced by unrealistic marketing information through digital channels and misleading marketing practices; (3) there are shortcomings in the way products are manufactured and distributed, linked to conflicts of interest that may arise as a result of the payment of inducements between product manufacturers and distributors; and i some investment products incorporate unjustifiably high levels of costs and consequently do not always offer Value for Money to the retail investor. Differences in the way rules are designed across legal instruments also have the potential to confuse investors and result in varying levels of investor protection.

These problems undermine retail investors’ trust in capital markets. According to a recent Eurobarometer survey ⁴, only 38% of consumers are confident that the investment advice they receive from financial intermediaries is primarily in their best interest. Lack of trust is one of the reasons contributing to lower levels of retail participation and is a drag on retail growth potential ⁵.

At the same time, financial literacy in the EU is too low. For too many people, the financial system can seem complex and impenetrable. People often lack the confidence, knowledge and skills to manage their everyday finances and to take important financial decisions, such as saving to buy a house or preparing for retirement. Low levels of financial literacy can impact an individual’s personal and financial well-being, particularly for vulnerable groups in society. Increasing financial literacy has therefore become one of the Commission’s key priorities ⁶ and is all the more important given the ongoing digitalisation of finance. Financial education ⁷ should be better tailored to meet the diverse needs of different groups of citizens. Central to this is empowering individuals to understand the benefits and risks involved when investing and the advice they receive, in order to make financial decisions in their best interests. This does not entail the expectation for people to become experts in financial services, but rather that they have the requisite knowledge, information and confidence to make decisions to meet their financial needs.

Considering the general economic context against which the measures in this strategy are assessed, the EU market for retail investments remains characterised by low levels of participation when compared with international peers. In 2021, approximately 17% of EU27 household assets were held in financial securities (listed shares, bonds, mutual funds and financial derivatives). In comparison, households in the US held around 43% of their assets in securities ⁸.

The EU retail investment strategy aims to strengthen the legislative framework to ensure that retail investors i are empowered to take more informed investment decisions that better correspond to their needs and objectives, and (2) are adequately protected in the single market by a coherent regulatory framework. This will enhance trust and confidence bringing citizens closer to capital markets and enhancing retail investor participation.

The EU retail investment strategy addresses a wide variety of issues along the retail investor journey, including financial literacy, client categorisation, disclosure and marketing rules, suitability and appropriateness rules, rules on advice including as regards inducements, and product governance rules. It proposes an enhanced framework to further improve transparency, in particular as regards cost; strengthened rules against misleading marketing communication; rules to ensure impartial and high-quality advice; and rules to ensure that products distributed to retail investors offer the prospect of Value for Money. The aim is to ensure a modernised and, as far as possible, simplified framework for retail investment which is aligned and coherent across the different sectors. While the key focus of the EU retail investment strategy is to ensure that the interests of retail investors are addressed, the EU retail investment strategy also addresses specific industry concerns, in particular by removing inconsistencies and overlaps of information requirements, and by adapting the provisions on regulatory disclosures so that they are fit for digital use.

• Consistency with existing policy provisions in the policy area

This proposal follows from Action 8 of the September 2020 New Capital Markets Union Action Plan, which is about building retail investors' trust in capital markets.

The proposal shares the objectives of existing legislation governing retail investor protection at EU level, which consists of the Markets in financial instruments Directive (MiFID ⁹) and the Insurance Distribution Directive (IDD ¹⁰), as it seeks to ensure a sufficient degree of investor protection as well as fairness, integrity and efficiency in the provision of investment and insurance-based investment services to retail investors. In addition, it is consistent with the rulebook applying to investment and insurance-based investment services, as well as investment funds and their managers (which, in addition to MiFID and IDD, also includes the Solvency II Directive ¹¹, the Directive on undertakings for collective investment in transferable securities (UCITS)¹² and the Alternative Investment Fund Managers Directive (AIFMD)¹³).

This proposal is adopted as one part of a package, together with a second legislative proposal (COM (2023) 278) which amends the Regulation on key information documents for packaged retail and insurance-based investment products (PRIIPs)¹⁴. The amending Regulation is fully complementary with this Omnibus Directive, as it aims to improve the legal framework for PRIIPs by adapting disclosures to the digital environment and the evolving needs of retail investors notably on sustainability, and by providing further clarity on the scope of PRIIPs with regards to corporate bonds with make-whole clauses and immediate annuities. Some of the changes, notably with regard to the use of electronic format, are proposed to better align with the approach under MiFID and IDD and build on the experience gained from the implementation of the pan-European personal pension product (PEPP)¹⁵ disclosure document.

A significant step to ensuring consistency and simplification of pre-contractual information requirements across financial services was taken when the Commission adopted its proposal to amend Directive 2011/83/EU concerning financial services contracts concluded at a distance and repealing Directive 2002/65/EC. Consequently, concerns about overlapping and inconsistent requirements regarding disclosures in the area of retail investments have been largely addressed resulting in a more streamlined and simplified framework.

The measures proposed below are expected to make the EU an even safer place for retail investors, help build their trust and facilitate their participation in capital markets on fairer terms. The current demographic trends require an enhanced planning by households to ensure a smooth lifecycle. In this respect, having a safer framework for investments in capital markets should help offering retail investors a wider range of opportunities. Enhanced retail investor participation in capital markets also has the potential to help increase the capital pool available for the market financing of economic activities and to enable companies to better diversify their sources of funding. In this regard, the proposal is consistent with a number of legislative and non-legislative actions taken by the Commission under its 2015 CMU action plan,¹⁶ the 2017 mid-term review of the CMU action plan ¹⁷ and the 2020 CMU action plan ¹⁸, aimed at facilitating access to finance for companies, especially SMEs, with a view to supporting jobs and growth in the EU.

• Consistency with other Union policies

Given its focus on the increasing digitalisation of investment services and marketing, the proposal is aligned with the Commission’s work on consumer protection in the context of digital finance ¹⁹, which aims at ensuring that consumers enjoy the benefits of digitalisation while being sufficiently protected from the risks arising from it. A key piece of consumer protection legislation in this area is the Digital Services Act ²⁰, whose objective is ensuring a fairer, more transparent and accountable online environment for consumers.

This proposal is also aligned with the objectives of upcoming Commission initiatives which will seek to facilitate data sharing within the financial services sector ²¹. With the standardised report on information collected by a firm on its client for the purpose of the suitability or appropriateness assessment, this initiative is expected to facilitate, if the client requests that report, more seamless and cost-effective data sharing and re-use of such information by other firms selected by the client. In turn, this should benefit consumers through improved more efficient and innovative products and services and should facilitate competition by increasing transparency and reducing switching costs.

For the proposed measures in the area of financial literacy, support is available from the Commission through the Technical Support Instrument ²².

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

• Legal basis

The EU has in place a legislative framework governing retail investor protection, which has been developed over several decades. The level of retail investor protection has been significantly strengthened over the years, in particular following the 2008 financial crisis. The current comprehensive legislative framework consists of five legal instruments which aim to harmonise – on a sector-by-sector basis – the requirements for retail investor protection in the area of investment services, insurance-based investment and asset management. The Directives subject to amendments in this proposal (the ‘Directives’) provide for regulatory frameworks on:

- the provision of investment services (‘MiFID’),

- the provision of insurance or reinsurance distribution services to third parties (‘IDD’),

- the take-up and pursuit of insurance business within the EU (‘Solvency II’),

- the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (‘UCITS’),

- Alternative Investment Fund Managers (‘AIFMD’).

The legal bases of the Directives are Articles 53 i and, in particular in the case of Directives (EU) 2009/138/EC and 2016/97, Article 62 of the Treaty on the Functioning of the European Union. EU-level action in accordance with these Articles is needed to continue aligning the current rules or to introduce new standardised rules.

• Subsidiarity (for non-exclusive competence)

According to the principle of subsidiarity, EU action may only be taken if the envisaged aims cannot be achieved by Member States alone. Regulation of investment services, the provision of insurance-based investment products, rules for UCITS and alternative investment funds and their managers (AIFMD) are long established at EU level. This is because only EU action can set a common regulatory framework that ensures the same level of retail investor protection across Member States, independently of the type of investment products or services offered and in full respect of the freedom of establishment and freedom to provide services. In this regard, this proposal, like the Directives it seeks to amend, is in full compliance with the principle of subsidiarity.

• Proportionality

This proposal aims to amend certain provisions of the Directives, in particular those on information provided to retail clients before and after making investments decisions; requirements on the marketing of investment products to retail clients; product oversight and governance; requirements for the provision of advice and other distribution services of investment products to retail clients; professional qualifications; and cross-border supervision. The amendments are necessary and proportionate to strengthen retail investor protection, while considering market participants’ interests and cost-efficiency.

• Choice of the instrument

As this proposal aims to amend the existing Directives 2014/65/EU, 2016/97, 2009/138/EC, 2011/61/EU, and (EU) 2014/91, the instrument chosen is an amending directive. The choice of a single amending directive is based on the objective of the EU retail investment strategy to achieve the same level of retail investor protection throughout the EU and across all investment products and distribution channels. This can be most effectively achieved through the enactment of consistent and, where needed, uniform requirements for all relevant sectors.

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 legislative framework specifically relating to retail investor protection. The principal conclusions are that the frameworks applicable to retail investors are broadly effective and coherent, continue to address needs and problems, and bring the intended added value. However, the evaluation also concluded that the intended objectives were not sufficiently achieved in areas such as disclosure of information, inducements and advice, product governance requirements and suitability assessments.

Despite existing rules governing disclosures, information can still be complex (in particular relating to costs), or not sufficiently useful or relevant to guide retail investors so that they make informed decisions. The investor protection rules governing disclosures and marketing communications are also not sufficiently adapted to the newly emerging and constantly evolving risks associated with the rapid growth of digital channels offering services.

With respect to the payment of inducements and the provision of advice, the existing safeguards, including transparency requirements, are not sufficient to address the potential conflicts of interest for financial service providers, given the existing information asymmetry between retail investors and such providers. The potential conflicts of interest due to the payment of inducements can lead to a product-bias on the part of financial advisors, resulting in the sale of more expensive products to retail investors or products which may not be in their best interest.

The current rules on product oversight and governance have set out a framework to govern the way products are designed and distributed. However, further improvement is needed to ensure that only products that deliver Value for Money are offered to retail investors. Some retail investment products on the market still incorporate unjustifiably high costs and/or do not offer value to retail investors.

Finally, the suitability and appropriateness assessment tests have been found to be broadly effective and efficient but they can be further improved to ensure that the assessments are performed at the right time (i.e. before products are recommended), to remove inconsistent practices and to ensure that they are adapted to the digital environment, and to take into account the investor’s need for portfolio diversification.

• Stakeholder consultations

The European Commission carried out various consultation activities as part of the preparation of this proposal.

Between May and August 2021, a public consultation on ‘A retail investment strategy for Europe’ gathered views from a broad group of stakeholders on various aspects pertaining to retail investments, namely: pre-contractual disclosures (including PRIIPs), inducements and quality of advice, the suitability and appropriateness assessments, financial literacy, complexity of products, the impact of increased digitalisation of financial services, investor categorisation, redress, the ESAs’ product intervention powers and sustainable investing.

186 responses were received from a variety of stakeholders representing business associations and organisations (59%), consumer organizations (2%), NGOs (5%), public authorities (9%), trade unions (2%), and citizens (19%). In addition, the Commission discussed various aspects of the review at several meetings of a group of Member State experts.

The results of the public consultation were considered in the proposal and the Commission sought to take account of the different stakeholder interests expressed. The most significant areas, where scope for improvements to the framework was identified by the respondents, were examined and are part of the proposal. These include financial literacy which was flagged by all groups of stakeholders, disclosure of information, suitability and appropriateness assessments and inducements and advice.

• Collection and use of expertise

Following formal requests for advice ²³ issued by the Commission on 27 July 2021, both ESMA and EIOPA provided an Opinion ²⁴^,²⁵ on 29 April 2022. ESMA and EIOPA’s Opinions informed the Commission’s impact assessment and the development of this proposal.

Annex 2 of the accompanying impact assessment lists additional sources considered when preparing this proposal, including targeted stakeholder consultations and outreaches. 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, ‘Disclosure, inducements, and suitability rules for retail investors study’, published in 2022 ²⁶.

The preparation of this proposal also benefited from the advice of the CMU High-Level Forum (CMU HLF), and contributions from the Financial Services User Group (FSUG)²⁷. Discussions were also held at meetings of the Government Expert Group on Retail Financial Services (GEGRFS), where Member States experts expressed support for the objectives of the retail investment strategy, but at the same time a large majority of Member States expressed concerns about potential disruptive effects of a ban on inducements to retail investment distribution systems.

• Impact assessment

This proposal is accompanied by an impact assessment (SWD(2023) 278). The impact assessment was submitted to the Regulatory Scrutiny Board (RSB) on 14 December 2022, and received a positive opinion with reservations on 20 January 2023 (SEC(2023) 330). It was subsequently amended to reflect the consultation with the RSB.

Overall, the impact assessment focuses on identifying and addressing specific failures at key stages of the retail distribution and investment process. It looks at issues that prevent retail clients from making the best use of investment product information (in PRIIPs, MiFID and IDD); it addresses the rules governing conflicts of interest, arising from inducements, at the ‘point of sale’ and at the production stage of investment products and services (in both MiFID and IDD), and it looks into product oversight and governance rules (for both distributors, hence in MiFID and IDD, and for product manufacturers, in UCITS, MiFID and IDD) to ensure that retail clients obtain value from their investment (‘Value for Money’).

For each of the three principal areas identified, namely i disclosure and marketing communications, (2) inducements and (3) Value for Money, the impact assessment assesses two alternative or, in the case of disclosures, two complementary policy options, in addition to the baseline scenario.

In the case of disclosures, the impact assessment considers targeted changes to disclosure rules aimed at improving their relevance for retail investors alongside targeted changes to address information deficiencies relating to marketing communications. As both options are complementary and present an improvement compared to the baseline scenario at a reasonable cost, they are both, cumulatively, the preferred option.

In the case of inducements, a choice between maintaining the current system to allow the payment of inducements under certain conditions while improving and harmonising sector-specific disclosures about inducements was assessed against a ban on all forms of inducements, including a subvariant containing a partial ban applied in the case of non-advised services (execution only). The impact assessment concludes that an EU-wide full ban would be the most effective measure to remove or significantly reduce potential conflicts of interest, by reducing an important source of consumer detriment.

However, an immediate and full ban on inducements would entail significant and sudden impacts on existing distribution systems, with consequences that are hard to predict. A partial ban would, on the other hand, have less impact on existing distribution systems, while still delivering benefits for retail investors. For this reason, the Commission took the decision not to put forward a full ban on inducements as part of this proposal.

Instead, as part of a staged approach, intended to allow operators to adjust their distribution systems and minimise the costs of such a change, this legislative package proposes to address the conflicts of interest that may arise due to the payment of inducements via a number of different measures including:

- a measure aimed at prohibiting the payment of inducements in execution-only environments where no advice is provided;

- a strengthened ‘best interest of the client’ principle applied in both MiFID and IDD;

- improved disclosures to the client regarding the payment of inducements, including a simple explanation of inducements.

The Commission will closely monitor the impact of these measures on the market, which will be based on in-depth information (provided as part of the obligations of the Value for Money approach). Three years after the adoption of the package, the Commission will assess the effects of this inducements regime on retail investors, in light of the additional safeguards taken, and will draft a report to the European Parliament and the Council. Where the assessment shows that the detriment to consumers remains, despite the additional safeguards, the Commission will consider proposing alternative measures in line with Better Regulation rules, including further extending the ban on inducements.

In the case of Value for Money, the impact assessment considered a choice between strengthening product governance rules for manufacturers ²⁸ by requiring the comparison of their products against relevant ‘manufacturer benchmarks’²⁹, and an alternative option to impose similar duties also at the level of distributors ³⁰, including the comparison of certain products with relevant ‘distributor benchmarks’³¹. The latter option, applying duties to both manufacturers and distributors, was considered the more effective and comprehensive way to ensure that investors are offered cost effective products.

The impact assessment considered a number of additional measures intended to further complete and complement the legislative package. These measures are designed to ensure improved supervisory enforcement, better qualified advisors, easing of criteria to be considered as a professional investor, a more efficient investor screening process, improved financial literacy levels and more flexibility for knowledgeable investors to access a wider set of products and services without unnecessary red tape.

Taken together, the package of measures is expected to increase retail investor protection and lead to better quality investment products for retail clients that yield better Value for Money (i.e., better quality and more cost-efficient products). This would both benefit existing investors, and encourage more citizens to invest. The impact assessment concludes that these reforms will generate some additional costs for the financial industry. These costs have been quantified in the impact assessment.

2. The impact assessment has been revised to address the comments of the RSB. The main improvements can be summarised as follows:

- With respect to the scope and scale of the problem and its effects on the retail financial services ecosystem, the underlying economic context is better explained and substantiated with data in the final text. Consumer detriment is explained better, as is the description of issues which now highlights the need to take urgent action. The presentation of the key policy choices and flanking measures in the final text also discusses certain elements of the policy options in more detail.

- Further quantifications and analyses have been included. The overall presentation of the costs and benefits of the preferred option package has been improved. Additional estimates of the impact of the inducement ban and the Value for Money measures are provided. Limitations regarding the quantification of disclosure measures are explained in more detail. Moreover, the final text has a more in-depth discussion of qualitative economic effects, including, among other things, a discussion on how certain measures are interlinked. Finally, an SME test has been added to the annexes.

- With respect to the ‘flanking measures’ which contribute to addressing the identified problems in addition to the main measures, the final text includes an additional table setting out the flanking measures that are assessed in annex, the problem that they seek to address and the objective they seek to achieve. The text also includes an explanation as to how the flanking measures interact with preferred options and produce synergy effects. A paragraph has been added outlining an alternative combination of options that was considered, which did not include an inducement ban. The paragraph also includes an explanation as to why the inducement ban was not taken up.

• Regulatory fitness and simplification

3. The proposed Directive improves regulatory fitness and simplifies the framework as follows:

- It removes inconsistencies and overlaps of requirements concerning the provision of information to clients that exist between Solvency II, IDD and PRIIPs as regards insurance-based investment products, something which can benefit insurance undertakings and insurance intermediaries, while preserving high retail investor protection.

- It introduces regulatory alleviations in MiFID for those investors with appropriate knowledge, experience, and ability to bear losses. This implies a reduction in information overload for such investors and a more efficient use of resources for product manufacturers and distributors.

- As regards digital readiness, the provisions on regulatory disclosures and on marketing to retail clients are adapted to be fit for digital use by ensuring electronic format as default, clarifying how product disclosures should be presented in a digital environment and introducing additional safeguards for marketing communications, including via social media and other digital channels.

On the other hand, additional administrative costs will arise from supervisory reporting against the Value for Money benchmarks that will be developed by ESMA and EIOPA. This obligation will imply one-off costs and ongoing costs for both manufacturers and distributors ³².

• Fundamental rights

The proposal respects the fundamental rights and observes the principles recognised by the Charter of Fundamental Rights of the European Union, in particular the freedom to conduct a business (Article 16) and consumer protection (Article 38). The proposal may interfere with rights to respect for private and family life (Article 7) and to personal data protection (Article 8) by expending the categories of personal data that are required for the appropriateness assessment of retail investors and requiring to retain personal data of investment marketing influencers when these influencers are natural persons. However, it is necessary and proportionate for ensuring a high level of protection of consumers in line with Article 52.

4. BUDGETARY IMPLICATIONS

The proposal is expected to have budgetary implications as a consequence of a number of new tasks conferred to ESMA and EIOPA.

For ESMA, allocation of an additional 6 full time employees (FTE) is needed for its workload and to take on the tasks of developing and administering Value for Money benchmarks and gathering and processing data received from NCAs. ESMA will also require additional budget for operational expenditure of EUR 1.5 million for the first three years of implementation to cover IT costs and costs related to externally contracted consumer testing of new consumer-facing disclosure tools, as well as the setting up and administering of collaboration platforms for NCAs.

For EIOPA, these new tasks will require over time a total of 3 FTE to take on the tasks of developing and administering Value for Money benchmarks and gathering and processing data received from NCAs. EIOPA will also require additional budget for operational expenditure of EUR 1.26 million for the first three years of implementation to access required data and to cover costs related to externally contracted consumer testing of new consumer-facing disclosure tools, as well as the setting up and administering of collaboration platforms for NCAs.

The financial and budgetary impacts of this proposal are explained in detail in the legislative financial statement annexed to this proposal.

5. OTHER ELEMENTS

• Implementation plans and monitoring, evaluation and reporting arrangements

The Commission will monitor progress towards achieving the specific objectives based on the non-exhaustive list of indicators in Section 8 of the accompanying impact assessment.

Five years after implementation, the Commission will carry out the next evaluation of the amendments of this proposal, in line with the Commission’s Better Regulation Guidelines.

This proposal does not require an implementation plan.

• Explanatory documents (for directives)

No explanatory documents are considered necessary.

• Detailed explanation of the specific provisions of the proposal

General structure of the proposal

This Omnibus amending Directive consists of five main sections referring to the different Directives to be amended. Article 1 of the proposal contains amendments to MiFID, while Article 2 proposes amendments to IDD. Article 3 contains amendments to Solvency II, while Articles 4 and 5 propose changes to UCITS and AIFMD respectively. The Explanatory Memorandum explains the proposed amendments per topic across the different Directives concerned.

Disclosure information: aiming to simplify and reduce the information presented to retail investors

The proposal contains a number of improvements to the regulatory disclosures framework which aim to ensure transparency for retail investors and enable them to take informed decisions.

Article 1(12), point (f) and Article 2(20) introduce a new paragraph 5c in Article 24 MiFID and a new paragraph 5 in Article 29 IDD respectively, requiring investment firms as well as insurance intermediaries and insurance undertakings distributing insurance-based investment products to display appropriate risk warnings in all information materials concerning particularly risky products, to alert retail investors to specific risks of potential financial losses. Article 1(17) point (c) and Article 2(6) introduce a new point (w) in Article 69(2) MiFID and point (q) in Article 12(3) IDD respectively, which state that Member States will need to ensure that competent authorities have the power to impose the use of risk warnings for particularly risky products. A mandate is given to ESMA and EIOPA to develop guidelines specifying the concept of particularly risky financial products, as well as implementing technical standards specifying the content and format of such risk warnings (Article 1(12), new paragraph 5c in Article 24 MiFID and Article 2(20), new paragraph 5 in Article 29 IDD).

Article 1(12) and Article 2(20) introduce a new paragraph (new Article 24(5c) MiFID and new Article 29(5) IDD) empowering ESMA and EIOPA, respectively, to impose the use of risk warnings on investment firms, insurance undertakings and insurance intermediaries, after consultation with the relevant competent authority/ies. They are empowered to do so in case of concerns that the use (or absence) of risk warnings may have a material impact on investor protection.

Article 2(15) introduces a new provision in Article 23 IDD (new Article 23(1)) that allows digital-by-default disclosure of information, in line with an obligation that already exists under MiFID. This rule will apply to all insurance products and is thus not limited to insurance-based investment products only. Article 1(12) point (g) introduces a new paragraph 5b in Article 24 MiFID and Article 2(15) introduces a new paragraph 4 in Article 23 IDD, mandating ESMA and EIOPA, respectively, to develop guidelines relating to the disclosure of information in electronic format.

Article 1(13) introduces a new Article 24b in MiFID, which deals exclusively with investment firms’ regulatory disclosures on costs, associated charges and payments made by third parties. Parts of already existing provisions on costs and charges under Article 24 i MiFID are moved to Article 24b i MiFID. Article 24b MiFID additionally prescribes standardisation of the presentation of such information on costs, associated charges and third-party payments. It also requires, specifically on third-party payments, an explanation of their purpose and quantification of their impact on expected returns, in a standardised and comprehensible way. Article 2(20) amends Article 29 IDD to improve and complement the already existing provisions on pre-contractual disclosures in the distribution of insurance-based investment products. In doing so, it also adds a requirement in Article29 i IDD to disclose information on all costs, associated charges and third-party payments, as well as on their impact on expected returns.

Under Articles 24b(2) MiFID and Article 29 i IDD, ESMA and EIOPA, respectively will have to develop draft regulatory technical standards on the basis of prior consumer testing that will set out the format and terminology that should be used by firms for the disclosure of information on costs and charges under MiFID, and for pre-contractual disclosures under IDD.

The new Articles 24b i and (5) MiFID and the additions in Article 29(2) and 29(3) IDD include a requirement for investment firms as well as for insurance undertakings and insurance intermediaries distributing insurance-based investment products to provide all retail clients and customers with an annual statement providing, among other things, information on costs and charges, including third party payments, and performance. They also set out, depending on the investment products offered, the minimum information requirements to be included in the annual statement. In view of the intrinsic long-term characteristics of insurance-based investment products, which are often used for retirement purposes, Article 29(3) IDD requires additional elements of information in the annual statement for these products, such as adjusted individual projections of the expected outcome at the end of the contractual or recommended holding period (point f).

In addition, Article 3(3) and 3(5) of the amending Directive provides for the deletion of Articles 183, 184 and 185 of Solvency II. In Articles 2(11) to (13), these requirements on mandatory pre- or post-contractual information and certain business conduct requirements are modernised and moved to IDD (from Solvency II) through amendments to Articles 18, 20 and 29(3) IDD. The proposed new Article 20(8a) IDD provides for a standardised insurance product information document for life insurance products other than insurance-based investment products. This new and user-friendly document will complement the already existing insurance product information document for non-life products and the PRIIPs KID for insurance-based investment products. Notably, Articles 2(11) to (13) amend IDD requirements relating to all insurance products and thus do not only apply to insurance-based investment products (specifically within the scope of the EU retail investment strategy). This is to avoid fragmentation in the disclosure rules, which apply to all insurance products and insurance-based investment products alike.

Protecting retail investors from misleading marketing communications and practices which emphasise benefits but downplay the risks

The proposal introduces a number of new provisions to address the risk of unbalanced or misleading marketing communications emphasising benefits only, and to clarify the responsibilities of investment firms and insurance distributors in relation to marketing communications, including when using digital channels and when relying on third parties.

Articles 1(3) and 2 i, point (c), introduce new subparagraphs (66) and (67) in Article 4 i MiFID, and new subparagraphs (20) and (21) in Article 2 i IDD, respectively, providing the definitions of marketing communications and marketing practices.

Article 1(7) amends Article 9(3) MiFID to include a requirement for investment firms to have a policy on marketing communications and practices, which the management body of an investment firm should define, approve and oversee.

Article 1(8) point (c) introduces a new paragraph 3a in Article 16 MiFID to include a requirement for investment firms to have effective organisational and administrative arrangements in place to ensure compliance with all obligations related to marketing communications and practices under Article 24c, and related delegated acts.

Since IDD does not provide for detailed organisational requirements for insurance intermediaries, no such specific organisational requirement could be introduced under IDD.

Article 1(12) point (b) amends Article 24(2) of MIFID by requiring investment firms that manufacture financial instruments to ensure that the strategy for the distribution of those financial instruments is compatible with the identified target market also in relation to any marketing communications and marketing practices.

Article 1(13) introduces a new Article 24c MiFID and Article 2(18) inserts a new Article 26a IDD, respectively introducing obligations on investments firms, and on insurance undertakings and insurance intermediaries distributing insurance-based investment products, in relation to marketing communications and marketing practices. The new articles include obligations to clearly identify marketing communications and to ensure they are appropriately attributed to the investment firm, insurance undertaking or insurance intermediary by which or on whose behalf they are made. Essential characteristics of the investment product or service should also be clearly presented in all marketing communications. Marketing communications and practices should also be developed, designed and provided in a manner which is fair, clear and not misleading, and should be balanced in their presentation of risks and benefits as well as appropriate for the target group of investors they are aimed at. This proposal empowers the Commission to adopt a delegated act specifying those essential characteristics and the conditions to an appropriate design.

Article 24c i MiFID and Article 26a i IDD provide for the division of responsibility with respect to the content and use of marketing communications between manufacturers and distributors of investment products and insurance-based investment products.

Article 24c(5) MiFID and Articles 26a(5) IDD require that Member States ensure firms’ management bodies receive annual reports on the use of marketing communications and strategies aimed at marketing practices, compliance with obligations on marketing communications and marketing practices, and on signalled irregularities and proposed solutions with obligations on marketing communications and marketing practices, pursuant to MiFID and IDD respectively.

Article 24c(7) MIFID and Article 26a(7) IDD extend the existing record keeping obligation to all marketing communications which are directly or indirectly made by the investment firms, insurance undertakings and insurance intermediaries. The obligation covers a period of 5 years, allowing for a derogation of up to 7 years at the request of competent authorities.

Article 24c(6) MiFID and Article 26a(6) IDD impose a requirement on Member States to ensure that national competent authorities have the necessary empowerment to take timely and effective action on non-compliance with the above obligations.

Tackling bias in the advice process: conflicts of interests, inducements and the introduction of a strengthened ‘best interest’ test for MiFID and IDD

The current rules governing conflicts of interest in the advice process due to the payment of inducement differ between MiFID and IDD. Articles 1(12) and 1(13) amend Article 24 MiFID and introduce a new Article 24a MiFID, while Articles 2(20) and (21) amend Article 29 IDD and introduce a new Article 29a IDD. They cover the obligations of, respectively, investment firms and insurance undertakings and insurance intermediaries distributing insurance-based investment products in relation to the payment of inducements.

In addition to the existing bans on inducements regarding independent advice and portfolio management, which are maintained in MiFID, Article 24a(2) MiFID introduces a ban on inducements paid from manufacturers to distributors in relation to the reception and transmission of orders, or the execution of orders to or on behalf of retail clients. These two investment services cover execution-only sales where no advice relationship exists between the investment firm and the client. Similarly, Article 29a i of IDD introduces a ban on inducements paid from manufacturers to distributors in relation to non-advised sales of IBIPs and thus has the same scope. Such partial ban would remove incentives for firms to give more prominence to certain products in their product offering and would benefit retail investors that invest via execution-only services, as they would avoid any charges due to the payment of inducements.

Specifically in relation to MiFID, the existing exemptions to the bans on inducements would continue to be applicable to the ban on inducements for execution-only services (e.g. payments or benefits which enable or are necessary for the provision of investment services, payments in relation to research, etc.). Minor non-monetary benefits not exceeding EUR 100 or of a scale and nature such that they could not be judged to impair compliance with the duty to act in the best interest of the retail investor are also allowed if they are clearly disclosed. Furthermore, as investment advice may be combined with the services of execution of orders and reception and transmission of orders, with the main service being investment advice, Article 24a MiFID clarifies that the ban on inducements in relation to the services of execution of orders and reception and transmission of orders is not applicable to situations where investment firms provide advice to the same client relating to one or more transactions covered by that advice. The ban on inducements is also not applicable in relation to fees or remuneration received or paid from an issuer for placement and underwriting services. To ensure that the latter exemption focuses on instruments that are critical to issuers’ ability to raise funds, such exemption should not apply as regards instruments that qualify as packaged retail investment products.

Revised safeguards are introduced for advised sales, obliging the distributor to ensure that the payment or receipt of inducements does not impair compliance with their duty to act honestly, fairly and professionally in accordance with the best interest of their clients and to disclose the existence, nature and amount of inducements to the clients.

Specifically in relation to IDD, Article 2(22), point (d) strengthens the safeguards for advice in Article 30(5b), and introduces a differentiation between advice given on an independent and non-independent basis in alignment with MiFID, if insurance intermediaries want to present their advice as ‘independent’. It does so by making the independent basis category compulsory instead of optional for Member States, and by banning the reception or the provision of inducements in relation to advice given on an independent basis. However, such a ban should not prevent insurance intermediaries from offering advice for which they may receive inducements, provided that the advice is not presented as ‘independent’ and retail customers are informed of the inducements in line with applicable transparency requirements. In view of the diversity of the insurance distribution structures in the Member States, it should also not prevent insurance intermediaries that are not employed by or contractually tied to an insurance undertaking but receive inducements from presenting themselves as not contractually tied to a specific insurance undertaking.

In addition, Article 1(12), point (a), proposes amendments to Article 24(1a) MiFID and Articles 2(21) and (22), introduce a new Article 29b and amend Article 30 IDD with the view to improving the quality of advice. These amendments further substantiate the obligation for investment firms, insurance undertakings and insurance intermediaries to act in accordance with the best interest of their clients and customers, by introducing a new test with clear criteria which will be applied both in MiFID and IDD (a test which replaces the existing ‘quality enhancement’ test of MiFID, and the ‘no detriment’ test of IDD). To act in the best interest of their clients and customers, financial advisors have to, as a minimum (i) base their advice on an assessment of an appropriate range of financial products, (ii) recommend the most cost-efficient financial product from the range of suitable financial products, and (iii) offer at least one financial product without additional features which are not necessary to the achievement of the client’s investment objectives and that give rise to additional costs, so that retail investors are presented also with alternative and possibly cheaper options to consider. Insurance undertakings and insurance intermediaries distributing insurance-based investment products must, in addition, ensure that the insurance cover included in the product is consistent with the customer’s insurance demands and needs.

The above safeguards to manage conflicts of interest replace the existing safeguards that allow for the payment or receipt of inducements to the extent they enhance the quality of the service under MiFID or do not have a detrimental effect under IDD.

Article 1(13) and 2(21) propose, in Article 24a(8) MiFID and Article 29a(6) IDD, a review clause requiring the European Commission to assess the effects of third-party payments on the retail investor segment 3 years after the transposition of this Directive, in order to determine whether the potential conflicts of interest caused by third-party payments have been reduced.

Amending product oversight and governance rules to ensure that undue costs are not charged and that products deliver Value for Money to retail investors

To strengthen product governance rules and regulate pricing processes, and with a view to limiting the offer of products that bear poor or no ‘Value for Money’ for retail investors, Article 1(9) introduces a new Article 16-a MiFID and Article 2(16) amends Article 25 IDD. The proposed amendments apply to PRIIPs and to insurance-based investment products, both at the level of the product manufacturer and distributor. Articles 4 i and 5 i also strengthen the pricing process that is intended to define and review the cost structure of UCITS and AIFs, by amending Articles 14 and 12 of the UCITS Directive and the AIFMD respectively.

The existing product governance frameworks in Article 16(3) MiFID are transferred and further 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 (Article 16-a i MiFID and Article 25 i IDD).

In relation to PRIIPs, the pricing process is strengthened to better account for costs and charges, including a requirement not to approve products that deviate from the relevant benchmark, unless the manufacturer is able to establish that costs and charges are justified and proportionate (Article 16-a i MiFID, and Article 25(2) IDD). For UCITS, the same effect is achieved through new paragraphs (1a) to (1e) of Article 14, and for AIFMD, through new paragraphs (1a) to (1e) of Article 12. A mandate is given respectively to ESMA and EIOPA to develop, make publicly available and regularly update cost and performance benchmarks against which the manufacturers must compare their products prior to offering them on the market (Article 16-a(9) MiFID and Article 25(8) IDD, Article 14(1f) UCITS and Article 12 (1f) AIFMD).

To facilitate the development of benchmarks, reporting obligations for manufacturers and national competent authorities towards ESMA and EIOPA are introduced, concerning the data on costs, charges and performance of PRIIPs (Article 16-a(2) MiFID and Article 25 i IDD, Article 20a UCITS and Article 24(2) AIFMD). Receipt of such data by ESMA and EIOPA is a crucial aspect of the Value for Money approach. Without such data, they would not be in a position to develop and refine reliable benchmarks against which Value for Money prospects of investment products can be measured. To limit, to the greatest extent possible, costs related to the new reporting obligations and to avoid unnecessary duplication, data sets should as far as possible be based on existing disclosure obligations.

As in the case of product manufacturers, a new requirement is introduced for distributors to quantify distribution costs and perform an overall price assessment against relevant cost and performance benchmarks, taking into account manufacturers’ own assessments (Article 16-a i MiFID, Article 25(5) IDD).

Article 16-a(5) MiFID also creates reporting obligations for distributors towards NCAs and ESMA as regards the costs of distribution of PRIIPs, including details on the cost of advice and inducements. Article 16-a(6) obliges distributors of PRIIPs manufactured by firms other than investment firms or manufacturers of UCITS or AIF, to report towards NCAs and ESMA data on costs, charges and performance of PRIIPs.

In the case of insurance-based investment products, reporting obligations towards NCAs and EIOPA are centralised at the level of the manufacturer as insurance undertakings typically have full control over the costs charged to the customer, including distribution costs. Distributors of insurance-based investment products are also required to check, as part of their pricing process, whether there are any costs at distribution level that are not taken into account in the pricing process of the manufacturer. If this is the case, they have to inform the manufacturer immediately so that the costs can be included in the centralised pricing and reporting process at the manufacturer’s level.

To ensure effective supervision, Article 16-a(7) MiFID and Article 25(7) IDD introduce a requirement for investment firms, insurance undertakings and insurance intermediaries to maintain records with respect to their assessments, both at the level of the manufacturer and of the distributor.

In the case of MiFID, Article 16-a(8) allows firms that both manufacture and distribute investment products to provide an integrated pricing process.

The pricing process for MiFID-covered products should also cover structured deposits. However, taking into consideration that these are in principle tailor-made products, benchmark development would be too complex an exercise. As a consequence, reporting obligations should not apply in relation to this group of PRIIPs.

Article 16-a(9) MiFID, Article 24 AIFMD, Article 20a UCITS and Article 25(8) IDD empower ESMA and EIOPA to develop and make publicly available benchmarks on the basis of data on costs and the performance of products reported by national competent authorities. The benchmarks, as a tool of comparison, should make the pricing process – at both manufacturing and distribution levels – more objective. A deviation from the relevant benchmark should introduce a presumption that costs and charges are too high, and that the product will not deliver Value for Money, unless it can be demonstrated otherwise. The comparison with benchmarks should be perceived as an additional exercise, which should be undertaken during the pricing process and be based on the relevant benchmark that is available. The fact that the benchmark which would be considered as relevant for the product is not available, does not relieve the manufacturer or distributor of the obligation to demonstrate that costs and charges are justified and proportionate.

Article 16-a(11) and (12) MiFID and article 25(9) and (10) IDD empower the Commission as well as ESMA and EIOPA to initiate the technical groundwork to create the relevant benchmarks. Such groundwork includes a delegated act to be developed by the Commission to determine the methodologies for the development of the benchmarks, as well as criteria which should be covered when justifying and demonstrating proportionality of costs and charges. The groundwork also includes a mandate to ESMA (Article 16-a(12) MiFID) and EIOPA (Article 25(10) IDD) to develop regulatory technical standards to define data sets, data standards and the arrangements of the various reporting obligations.

The newly inserted Article 16-a MiFID contains provisions on product governance, and Article 16a contains updated cross references.

Articles 4 i and 5 i amend Article 14 UCITS and Article 12 AIFMD, respectively, to also include new provisions to ensure that costs are not undue. The provisions on undue costs are currently included in Level 2 of the UCITS Directive and the AIFMD, and in ESMA’s Level 3 provisions. ESMA has highlighted the lack of convergence in the area of undue costs due to the lack of a clear definition and clear empowerment at Level 1 for Level 2 work. Therefore, the new Articles 14(1a) to (1f) UCITS and 12(1a) to (1f) AIFMD define the conditions for considering that costs are due and provide rules in the pricing process to ensure that these conditions are met.

Ensuring that suitability and appropriateness tests are better adapted to retail investors’ needs

In order to clarify and where relevant strengthen the requirements that distributors need to comply with when assessing the suitability of a recommendation or the appropriateness of a financial product for the retail investor, Articles 1(14) and 2(22) amend Article 25 MiFID and Article 30 IDD.

The proposals introduce an obligation for investment firms as well as insurance undertakings and insurance intermediaries distributing insurance-based investment products to explain the purpose of the assessments to clients and customers in a clear and simple way, and to obtain all relevant information from clients and customers which may be necessary and proportionate for the assessments. The proposal clarifies that retail investors need to be informed, via standardised warnings, about the consequences on the quality of the assessment if they do not provide accurate and complete information.

The suitability and appropriateness assessments need to be conducted in good time before the provision of the relevant investment service or before the customer is bound by an insurance contract or offer. A suitability assessment report needs to be provided to clients/customers sufficiently in advance of the conclusion of the transaction to enable clients to seek and receive additional clarifications, where needed.

The need for portfolio diversification will be also added as one of the elements that distributors need to assess when considering the suitability of a specific product or service on the basis of information obtained from the client or customer, including information on any existing portfolios.

To encourage the provision of independent and cheaper advice, the proposal introduces the possibility for independent advisors to provide advice limited to a range of diversified, non-complex and cost-efficient financial instruments. For these products, distributors will be able to perform a suitability assessment on the basis of more limited information about the client and customers. Given that the advice is limited to well-diversified and non-complex products, an assessment of the knowledge and experience of clients, together with their portfolio diversification, will not be required.

To increase the relevance of the appropriateness assessment and strengthen the safeguards protecting retail investors from inappropriate investments, the scope of the client and customer’s information that intermediaries need to obtain and assess is expanded to also encompass the capacity to bear full or partial losses and risk tolerance. In case of a negative appropriateness assessment, the intermediary may only proceed with the transaction at the client’s explicit request.

Ensuring high professional standards for investment advisors

The revised rules aim to strengthen and align the requirements on the knowledge and competence of investment advisors set out in MiFID II and IDD. Articles 1(13) and 2(5) propose amendments to Article 24d MiFID as well as to Article 10 and Annex 1 IDD.

Article 24d MiFID is amended and specific requirements that are currently stipulated in ESMA Guidelines, together with an additional element regarding sustainable investments, are included in a new Annex V to MiFID. Compliance with the requirements has to be proved by obtaining a certificate. In addition, a minimum requirement for ongoing professional training is introduced in MiFID, in line with existing requirements under IDD. In IDD, the requirements regarding knowledge and competence set out in Annex I are strengthened and aligned in the same way. Compliance has to be proven by a certificate. Moreover, for IDD, the knowledge requirements extend to all insurance intermediaries and thus covers knowledge in relation to any insurance products being distributed, not just insurance-based investment products.

Client categorisation: easing restrictions for investors to qualify as professional

To ensure more appropriate classification of clients and to reduce administrative burdens, Annex I to this Directive amends Annex II of MiFID, which contains the identification criteria for clients who may be treated as professional on request. The amendments include a reduction of the wealth criterion from EUR 500 000 to EUR 250 000, and the insertion of a possible fourth criterion relating to relevant education or training. The amendments also create the possibility for legal entities to qualify as professional on request by fulfilling certain balance sheet, net turnover and own funds criteria. Under IDD there is no need for such distinction as all insurance-based investment products are considered retail products, so no such amendment is introduced.

Strengthening supervisory enforcement

The package also envisages measures to strengthen supervisory enforcement, in particular in the context of the growth of digital channels and as regards the cross-border provision of services.

Articles 1(17) and 2(6) introduce amendments in Article 69 MiFID and Article 12(3) IDD, respectively, to enable supervisors to use supervisory tools and quickly take action against misleading marketing practices (Article 69(2) point (ka)), restrict access to websites that pose a threat to investor protection (Article 69(2), point (v)) and carry out mystery shopping activities (Article 69(2) point (ca). Article 12(3) IDD introduces a detailed list of powers that national competent authorities must possess for the performance of their duties under this amending Directive. This measure enhances the alignment of IDD with MiFID and will improve supervisory efficiency and coordination, strengthening the protection of customers of insurance products and retail investors. In addition, Articles 1 i and 2(24) introduce new Article 5a MiFID and Article 35a IDD, respectively, setting requirements for competent authorities to have adequate procedures in place to prevent the offering of unauthorised investment services or activities, including related marketing, and to establish information channels to notify and warn investors of such services or activities, e.g. through warnings lists available on the European supervisory authorities’ websites.

To strengthen supervisory enforcement in cross-border cases, the proposal includes the following additions and changes:

- Articles 1(16) and 2 i insert the new Article 35a MiFID and Article 9a IDD respectively to introduce reporting for investment firms and insurance distributors on their cross-border activities. This will enable national competent authorities as well as ESMA and EIOPA to have a better overview of the scale of cross-border provision of services in the internal market, identify areas that supervision should focus on and where stronger cooperation may be needed, and codify reporting that is already carried out to a large extent at the ESA’s initiative.

- Articles 1(21) and 2(7) introduce the new Article 87a MiFID and Article 12b IDD respectively to provide for the establishment of collaboration platforms that facilitate closer collaboration between national competent authorities and the European supervisory authorities to address cross-border issues. They also aim at enhancing the role of ESMA and EIOPA in complex cross-border cases where the supervisory authorities involved fail to reach a common view in a cooperation platform.

- Article 86 MiFID and Articles 5, 8 and 9 IDD already provide for a mechanism that allows host Member States to take precautionary measures in case of harmful behaviour not adequately addressed by the home Member State’s competent authority. Article 1(20) of this amending Directive proposes to amend the existing provisions to accelerate and facilitate cooperation between NCAs, by facilitating information exchange and easing the conditions under which a host authority can take action (in case the competent authority of the home Member States does not act or does not act adequately). Competent authorities will also be able to directly refer to the findings drawn by an initiating host competent authority, where similar harmful activities are observed on their territory and are not adequately addressed by the home authority. Article 2(3) provides for similar amendments in Article 5 IDD.

Articles 1(5), 1(6) and 2(2) aim to strengthen supervisory convergence as regards the authorisation of firms, via an amendment to Article 7(3), Article 7(3a) and Article 8 MiFID and Article 3(5) and Article 3(5a) IDD, whereby competent authorities should share information, centralised by ESMA and EIOPA, on the reasons that led them to refuse or withdraw the authorisation from an investment firm or the registration of an insurance intermediary. Similarly, Article 1(11) of this Directive inserts two new paragraphs, Article 21(3) and Article 21 i MiFID, to clarify that ESMA or any host Member State may request that the competent authority of the home Member State reviews whether a given firm still complies with the conditions for authorisation.

Promotion of financial literacy

To ensure that Member States promote financial education measures at national level so that existing and prospective retail investors are able to invest responsibly, Articles 1(22) and 2(9) respectively insert the new Article 88a MiFID and Article 16a IDD.

Please note

Contents

1.

This goal is shared by the co-legislators:

2.

The impact assessment has been revised to address the comments of the RSB. The main improvements can be summarised as follows:

3.

The proposed Directive improves regulatory fitness and simplifies the framework as follows: