A&O Shearman | FinReg | European Commission Publishes Retail Investment Strategy
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  • European Commission Publishes Retail Investment Strategy

    On May 24, 2023, the European Commission published a Retail Investment Strategy package aimed at enhancing retail investor protections across the EU and encouraging participation in the EU capital markets. The package comprises an amending Directive, which makes changes across a range of EU legislation, and an amending Regulation, which revises the EU's Packaged Retail and Insurance-based Investment Products Regulation.

    The amending Directive makes changes to the Markets in Financial Instruments Directive, Insurance Distribution Directive, the Undertaking for Collective Investment in Transferable Securities Directive, the Alternative Investment Fund Managers Directive and the Taking-up and Pursuit of the Business of Insurance and Reinsurance Directive (known as Solvency II). The changes made by the amending Directive cover the following areas:
    • Marketing communications and disclosures
    The amending Directive will mandate investment firms, insurance intermediaries and insurance undertakings to use risk warnings that flag the risk of potential losses in information materials, including marketing communications, provided to retail clients. Marketing communications must be fair, clear and not misleading, presenting a balanced view of the risks and benefits of a product. In addition, marketing communications must be identified as such and attributed to the appropriate firm, and must set out the key characteristics of the investment product or service. Investment firms will also be required to have a policy on marketing communications and practices and to have organizational arrangements that ensure compliance with all obligations related to marketing communications.
    • Inducements
    A prohibition on inducements for execution-only sales is being introduced. The existing bans on inducements for independent advice and portfolio management will remain. Firms will need to ensure that their duty to act honestly, fairly and professionally in accordance with the best interest of their clients is not affected by the payment of any inducements and will have to disclose inducements to clients.
    • Best Interests Test
    A new best interests test will replace the existing test and require investment firms to (i) assess a range of financial products, basing their advice on the assessment, (ii) recommend the most cost-efficient financial product from the range of suitable financial products, and (iii) offer at least one financial product that does not have elements which are unnecessary for the clients investment objectives.
    • Appropriateness and Suitability Tests
    A new obligation will require investment firms, insurance undertakings and insurance intermediaries to explain to clients clearly and simply the purpose of the appropriateness and suitability assessments. In addition, firms must inform retail investors of the consequences on the quality of the assessment if inaccurate or incomplete information is provided by the retail client. These requirements will be less onerous for independent advisors whose advice is limited to a range of diversified, non-complex and cost-efficient financial instruments. For those products, independent advisors can conduct their suitability assessment on the basis of more limited information about clients.
    • Product Governance
    The product governance rules and pricing process rules under MiFID, IDD, AIFMD and UCITS are amended for PRIIPs and insurance-based investment products. Amendments are also made to the PRIIPs Regulation, discussed below.
    • Competence
    The amending Directive will revise the competence and knowledge requirements for investment advisors. In addition, certain requirements currently set out in guidelines of the European Securities and Markets Authority will be included in a new Annex V to MiFID.
    • Client Categorisation
    The MiFID client categorisation criteria for clients opting to be treated as a professional client will be amended by, among other things, reducing the threshold for the client's financial instrument portfolio from EUR 500,000 to EUR 250,000, and introducing the potential for a legal entity to qualify as a professional client if certain financial criteria are met.

    The amending Regulation revises the EU PRIIPs Regulation. The main change is to amend the Key Information Document (KID) by introducing two new sections. The first is a 'Product at a glance' section, which is intended to highlight the information on an investment product type, its costs and the level of riskiness, recommended holding period and presence of insurance benefit. The second new section is called 'How environmentally sustainable is this product?', which aims to provide harmonized information about the sustainability elements of investment products.

    The amending Regulation also clarifies that certain products are not within the scope of the PRIIPs Regulation, including certain types of corporate bonds with make-whole clauses (provided the bonds are redeemed at a fair value) and products providing immediate annuities without a redemption phase. This resolves a major unintended consequence of the PRIIPs regulation for capital markets transactions, which is discussed in our client note, PRIIPs and Capital Markets Transactions: A Better Way Forward?.

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