The EU’s Retail Investment Strategy - more than just inducements. A further attempt by the European Commission to get EU citizens to the capital market.  

The Retail Investment Strategy in a Nutshell 

With only 30 per cent of EU citizens actively investing in the capital markets, the Commission has long been working on proposals that could make a meaningful difference by tackling transparency and cost issues. This has been focused on restriction to the inducements system of compensating intermediaries and the no advice-no fee principle, as ways to help investors make informed and cost-efficient investment choices. The challenge has been that these two main pathways for progress have remained narrowly centred on these two options.  

After intense lobbying by industry, Finance Ministers and MEPs, Commissioner McGuinness stepped back from proposing a full inducements ban in the Retail Investment Strategy (RIS) published on 24 May. Instead, the RIS includes an inducement ban on fees for execution-only activities. While all Member States, besides the Netherlands, welcomed the Commission’s decision against a full ban, in the European Parliament MEPs from the left are continuing to push for this. Other provisions in the strategy include complex transparency requirements and benchmarks to signal value for money that industry will need to engage with.  

More transparency equals more participation?  

While the ultimate goal of the RIS is to increase retail participation in EU capital markets, it is unclear whether the proposed targeted changes to transparency and disclosure requirement can actually deliver substantial benefits to end investors. Over recent years there have been several changes along these lines, which have not increased participation. In the RIS proposal, the Commission suggests changes to the format and terminology that should be used by firms for the disclosure of information on costs. ESMA and EIOPA are tasked with amending the existing regulatory technical standards i.a. for precontractual disclosures.  Yet this cannot be expected to overcome the related issues of trust and risk appetite – most Europeans would still rather save money in their bank accounts than invest in the capital markets.  

The Commission’s ambition to enhance value for money is certainly crucial for increasing participation, yet several questions remain on what this needs to look like to cut through. The Commission has mandated the ESAs with designing a benchmark to indicate value for money across certain product ranges. These benchmarks are intended to serve as tools to effectively compare the costs and performances of a very wide range of investment products. The Commission intends to make it easier to identify which products depart from the average scores across a variety of metrics and thus, in their view, do or do not represent value for money.  

This very complicated approach, however, has given rise to concerns about how the ESAs will develop these benchmarks to reliably reflect average characteristics across all financial products covered by PRIIPs.  If not accurately calibrated, however, this could inadvertently create a distortion in the market by introducing de facto cost controls for products ranked above the average on costs.  

Looking across the channel   

The Commission’s commitment to an amended PRIIPs KID contrasts with the UK approach where we expect to see this replaced with a more outcomes-focused disclosure regime alongside the existing inducements ban. This would give firms more discretion over how they communicate key messages to investors with the hope that they will be better able to find the best ways to engage retail investors. The UK is also re-considering asset management policy more broadly with its discussion paper recently published for consultation which covers inconsistencies within the current regulatory regime, improvements to the regime particularly around treatment and oversight of less liquid assets, technological change and investor engagement. Whilst the FCA has stressed the importance of international convergence, in practice the UK is unlikely to align very precisely with the EU proposals being considered at the same time. Though neither set of proposals is likely to be particularly radical, the end result is likely to be further divergence and additional costs for the industry.  

Agreement under the current EU Commission mandate?  

The European Parliament elections in June 2024 mean that there is very little time left in this political cycle for the EU co-legislators to reach agreement on the RIS. However, looking at the most controversial elements around inducements and product governance, we expect the depths of disagreement on these to complicate efforts to reach an agreement. Especially in the Parliament, we are likely to see some pushing from the left-of-centre groups to further enhance transparency and maybe even bring back a full inducements ban. While this is very unlikely to happen it can lead to delays in finding a common position. In the Council, the situation is different where we expect capitals to have a more unified position and be more aligned with the Commission proposal than MEPs.

This blog post was written by Lisa Keuper, manager, and Fiona Wright, partner, both working on EU financial services. Flint has offices in London, Asia Pacific, Dublin, France and Berlin working jointly on EU, UK, and international financial services regulation.  To find out more about how Flint can help you navigate the risks and opportunities of these developments,  get in touch. 

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