The European Commission has published its retail investment package in a bid to “empower” retail investors.
The proposals aim to allow retail investors to make investment decisions that are aligned with their needs and preferences, ensuring that they are “treated fairly and duly protected”, as the EU looks to trust and confidence into the financial industry.
As part of the package, the EU will be banning inducements for “execution-only” sales, where no advice is provided, to ensure that financial advice is “aligned with retail investors’ best interests”.
The commission said that stricter safeguards and transparency will also be introduced where inducements are allowed. This comes weeks after International Adviser confirmed that the EU was set to u-turn on its bid to ban asset managers and insurers from paying financial advisers for recommending their investment products.
EU financial services commissioner Mairead McGuinness said: “We are not proposing a full ban on inducements, or commissions, or indeed however you determine the practice linked to inducements. At this stage, we have made the assessment very carefully that it would be too disruptive to have a ban overnight.
“However, we are banning inducements for execution-only sales, where no advice is involved. We are introducing stricter requirements on when inducements can be paid.”
The package also included an array of measures such as:
- Improve the way information is provided to retail investors about investment products and services, in ways that are more meaningful and standardised, by adapting disclosure rules to the digital age and investors’ growing sustainability preferences;
- Increase transparency and comparability of costs by requiring the use of a standard presentation and terminology on costs. This will ensure that investment products bring real value for money to retail investors;
- Ensure that all retail clients receive at least annually a clear view of the investment performance of their portfolio;
- Protect retail investors from misleading marketing by ensuring that financial intermediaries are fully responsible for the use (and misuse) of their marketing communication, including where it is made via social media, or via celebrities or other third parties they remunerate or incentivise;
- Preserve high standards of professional qualifications for financial advisers;
- Empower consumers to make better financial decisions, by encouraging member states to implement national measures that can support citizens’ financial literacy, regardless of their age, and social and educational background;
- Reduce administrative burdens and improve the accessibility of products and services for sophisticated retail investors, by making the eligibility criteria to become a professional investor more proportionate; and
- Enhance supervisory cooperation to make it easier for national competent authorities and European Supervisory Authorities to ensure that rules are properly and effectively applied in a coherent manner across the EU and to jointly fight fraud and malpractices.
The EC said that package is “wide-ranging in scope and touches on the entire investment journey of the consumer”.
The changes will revise the existing rules set out in the Markets in Financial Instruments Directive (Mifid II), the Insurance Distribution Directive (IDD), the Undertaking for Collective Investment in Transferable Securities (Ucits) Directive, the Alternative Investment Fund Managers Directive (AIFMD).
It will also adapt the take-up and pursuit of the business of Insurance and Reinsurance Directive (Solvency II), as well as revise the Packaged Retail and Insurance-based Investment Products (Priips) Regulation.
Lee Eldridge, group chief executive at Chase Buchanan, said: “The EU has identified a number of helpful action points to address problems that exist within the wider European market for both investment and insurance products.
“As with both the Priips and IDD legislation, we believe that the detail of how the measures are implemented will be very important. The implementation needs to be clear, and consumer-centric, not designed to fulfil compliance or bureaucratic goals.
“We welcome the requirements for increased disclosures, better adviser education, and more consistency across different national interpretations of the legislation. The more informed that our customers and consumers are, the better the financial outcomes that will arise over time.
“Above all, we are pleased to see that the EU is taking direct action on the costs of financial products across the member states. This should help create more fair outcomes for our end clients and put the EU on par with other jurisdictions worldwide.”
The EC said that, while Europe has one of the highest individual saving rates in the world, people are much more reluctant to invest in capital markets and financial products.
In 2021, for example, around 17% of EU households’ assets were held in financial securities – like listed shares, bonds, mutual funds, financial derivatives.
By contrast, households in the United States held around 43% of their assets in securities.
Valdis Dombrovskis, executive vice president of the EC, added that the package will boost retail investors’ “trust and confidence to make the investment decisions that suit them best”.
“Europe’s economy needs retail investors,” he said. “Our proposals are designed to encourage more of them to participate in capital markets. This is important for the Capital Markets Union to succeed, because capital markets need to work for people. We need to make Europe an attractive, safe place for people to invest.
“We are proposing to improve EU laws concerning retail investment. These include simplifying and reducing the information presented to retail investors, and making sure that products represent value for money by not charging undue or unreasonable costs. We want to ensure high professional standards for investment advisers, including in the growing area of sustainable investment. And we want to tackle any bias in the advice so that advisers act in the best interest of the client.”
Jason Porter, business development director at Blevins Franks, said: “The digital age means retail investors have access to a huge amount of information and data. But they will also find themselves confronted by misleading marketing through a variety of media channels. The Retail Investment Package aims to provide sufficient regulation and oversight in respect of the content of marketing of financial securities.”
Overall, the EU changes are looking to fundamentally improve the outcomes for retail investors – and this could have as big as an impact as the Consumer Duty in the UK.
John Westwood, chairman at Blacktower, said: “These new rules are a significant step towards empowering retail investors and ensuring they have access to clear and meaningful information. The focus on adapting disclosure rules to the digital age and sustainability preferences reflects the evolving needs of investors in today’s world.
“The emphasis on transparency will help retail investors make more informed decisions, while standardising the presentation and terminology on costs should ensure investors get real value for their money when choosing investment products.
“At the same time, the requirement for retail clients to receive an annual clear view of their investment performance is a crucial measure to enhance accountability and provide investors with a comprehensive understanding of how their portfolios are performing.
“Protecting retail investors from misleading marketing is commendable. Holding financial intermediaries responsible for the use of their marketing communication, including on social media and through third parties, ensures accountability and safeguards investors from deceptive practices.”
David Vacani, principal at Beacon Global Wealth Management, added: “We welcome these proposals and their intent and it is great to see this movement forward for clients in the EU . Any steps that make it easier for clients to make investment decisions that are aligned with their needs and preferences, ensuring that they are treated fairly and duly protected is to be welcomed.”