European Commission Consultation on a Retail Investment Strategy: Member Call 10 June 2021 at 3:00 pm BST/4:00 pm CEST/10:00 am EDT
[33532]
May 13, 2021
TO: ICI MembersICI Global Members
Global Advocacy Coordination Advisory Committee
Global Operations Advisory Committee
ICI Global EU Capital Markets Union Task Force
ICI Global Regulated Funds Committee SUBJECTS: International/Global
MiFID, EMIR, AIFMD, UCITS V RE: European Commission Consultation on a Retail Investment Strategy: Member Call 10 June 2021 at 3:00 pm BST/4:00 pm CEST/10:00 am EDT
On 11 May 2021, the European Commission ("the Commission") published a consultation on a retail investment strategy for Europe ("the consultation").[1] The consultation covers a range of issues, including financial literacy, digital innovation, disclosure, suitability and appropriateness assessments, investor categorisation, inducements and advice, product complexity, redress, product intervention powers and sustainable investments. The Commission is accepting feedback on the consultation by 3 August 2021 via an online form. ICI Global intends to respond to the consultation and will hold an initial member call to discuss its response on Thursday 10 June 2021 between 3:00-4:00pm BST/10:00-11:00 am ET via Zoom (details below).
Link: https://ici-org.zoom.us/j/8451715029?pwd=d2tnZklWOEJNQVpIQi91NXY1M2dPZz09 Meeting ID: 845 171 5029 Passcode: 1925Background
The consultation is a key component of the Commission's roadmap[2] towards the publication of an EU strategy for retail investors ("the strategy") in the first half of next year, under the auspices of its revised Capital Markets Union action plan.[3] The strategy aims to enable individual investors to benefit from:
- Adequate protection;
- Bias-free advice and fair treatment;
- Open markets with a variety of competitive and cost-efficient financial services and products; and
- Transparent, comparable and understandable product information.
The Commission has also stated that the resulting legislation should be forward-looking and should reflect ongoing developments in digitalisation and sustainability, as well as the increasing need for retirement savings.
Consultation
The consultation contains 86 questions, organised into 13 sections. The most relevant questions for global regulated funds are outlined below under each section of the consultation.
General Questions (Questions 1.1-1.6)
The Commission notes that current EU rules regarding retail investors (e.g., UCITS, PRIIPs, MiFID II, PEPP etc.) aim at empowering investors, in particular through transparency of key product features and by protecting investors through safeguards against mis-selling. The Commission asks whether the current EU retail investor protection framework sufficiently empowers and protects retail investors (Question 1.1) and whether existing limitations are justified or unduly hinder retail investor participation (Question 1.2.) Furthermore, the Commission asks whether there are any retail investment products that retail investors are prevented from buying due to EU regulation (Question 1.3), whether various factors might discourage or prevent retail investors from investing (Question 1.4), the extent to which products are accessible to retail investors (Question 1.5), and the main areas of possible improvement (Question 1.6.)
Financial Literacy (Questions 2.1-2.2)
The Commission notes the importance of financial literacy in empowering individuals to adequately manage their finances and invest by enabling them to understand the risks and rewards surrounding retail investing as well as the different options available. The Commission raises questions about the outcomes of financial literacy for retail investors (Question 2.1) and the measures that might be pursued at EU level to support financial literacy (Question 2.2.)
Digital Innovation (Questions 3.1-3.11)
The Commission notes the impact of digitalisation and technological innovation on the way people invest and highlights the associated opportunities, risks and challenges. Furthermore, the Commission highlights the benefits of open finance and its intention to propose legislation on a broader open finance framework.[4] The Commission raises questions about the benefits and risks of an open finance approach (Question 3.1) and the tools and services that might be enabled through open finance (Question 3.2.)
The Commission asks whether the contents of publicly available documentation should be machine-readable to enable data to be easily extracted and used for various purposes such as aggregation, comparison or analysis (Question 3.3.)
The Commission notes that rules on marketing and advertising remain predominantly a national competence but, particularly given the increasing use of digital media, asks whether this constitutes an obstacle for retail investors to access investment products on a cross-border basis (Question 3.4.) Furthermore, the Commission asks whether the needs to be stricter enforcement of rules on online advertising to protect against mis-selling (Question 3.5) and whether there is a need for further EU coordination/harmonisation of national rules on online advertising and marketing (Question 3.6.)
In the context of the Gamestop episode, the Commission asks about the importance of the role played by social media platforms in influencing retail investor behaviour (Question 3.7) and the risks of retail investors relying on unverified information or on information not appropriate to their individual situation that is disseminated via such platforms (Question 3.8.) The Commission asks whether the rules concerning dissemination of investment related information via social media platforms need to be reinforced at EU level (Question 3.9) and whether retail investors are adequately protected (Question 3.10.) Furthermore, in the context of online products offerings the Commission asks how important it is that lower risk or not overly complex products appear first on the listing of products (Question 3.11.)
Disclosure Requirements (Questions 4.1-4.15)
The Commission highlights differences in the rules on pre-contractual disclosure and ongoing disclosure which make comparisons between products more difficult for retail investors. In instances where no Key Information Document (KID) is provided, the Commission asks whether this enables retail investors to adequately understand various product features (Question 4.1.) The Commission asks whether the pre-contractual information that currently provided to retail investors is sufficiently understandable, reliable, and contains the right amount of information (Question 4.2.) Furthermore, the Commission asks whether the language used in pre-contractual disclosures is understandable for retail investors (Question 4.3) and at what stage in the retail investor decision making process should pre-contractual disclosures be provided to retail investors (Question 4.4.).
The Commission raises questions about the usefulness of pre-contractual disclosures for the comparison of different investment products (Question 4.5) and whether this comparison should extend to products offered by different financial entities, such as an investment related insurance product and an investment fund (Question 4.6.) Furthermore, the Commission asks whether there are overlaps, inconsistencies, redundancies and gaps in EU disclosure rules with respect to information on product cost, risk and performance (Question 4.7.)
The Commission asks how important various types of information are when considering retail investment products (Question 4.8), whether the current MiFID II costs disclosure regime is sufficient and whether retail investors would benefit from ex-post information in all cases (Question 4.9.) The Commission asks what the maximum length and/or word count of pre-contractual disclosures should be (Question 4.10) and whether additional information should be provided for more complex products (Question 4.11.)
In considering the medium and presentation of pre-contractual disclosures, the Commission asks whether documents should be made available on paper by default or in another format (Question 4.12) and the importance of translating documents into the official language in the place of distribution (Question 4.13.) Furthermore, the Commission asks how access to, and the readability and intelligibility of, pre-contractual disclosures can be improved (Question 4.14) and when information is disclosed via digital means, how important various key factors are in helping retail investors make investment decisions (Question 4.15.)
PRIIPs Regulation (Questions 5.1-5.8)
In light of the Commission's review of the PRIIPs Regulation, including the ESA's recent draft Regulatory Technical Standards,[5] the Commission asks whether the PRIIPs Regulation has achieved various core objectives (Question 5.1) and whether retail investors can find and access KIDs and what can be done to improve this (Question 5.2.)
The Commission asks whether and how the PRIIPs KID should be simplified (Question 5.3), whether there are inconsistencies or discrepancies in the implementation of the PRIIPs Regulation (Question 5.4) and whether the supervision of PRIIPs KIDs is consistent across Member States (Question 5.5.)
The Commission asks product manufacturers for their experience of the cost of producing the PRIIPs KID and PEPP KID (Question 5.6), the cost of producing updates to the KID (Question 5.7) and the factors in preparing, maintaining and distributing the KID which are most costly (Question 5.8.)
Suitability and Appropriateness Assessment (Questions 6.1-6.13)
The Commission raises various questions about the suitability requirements including whether they are effective in ensuring that retail investors are not offered unsuitable products (Question 6.1), how any problems might be addressed (Question 6.2) and whether they are adapted to the increasing use of online platforms and brokers (Question 6.3.)
The Commission also raises various questions about whether the appropriateness test serves retail investor needs and is effective in ensuring that retail investors do not purchase products that they are not able to understand or are took risky (Questions 6.5.) Furthermore, how any problems with the appropriateness test might be addressed, whether the rules are sufficiently adapted to the increasing use of online platforms and brokers (Question 6.6) and whether providing a warning that a product is inappropriate is sufficient protection for retail investors (Question 6.7.)
Current MIFID rules do not require an appropriateness test in cases where orders are executed, or transmitted and received, at the initiative of the client and in respect of certain non-complex products. Instead, the client is informed that not appropriateness of the client has not been assessed and that they do not benefit from certain MiFID investor protections. The Commission asks whether an appropriateness test should be required in such situations (Question 6.8.)
In the context of the current product governance rules, the Commission asks whether the current target market determination process needs to be improved or clarified (Question 6.9.)
Reviewing the Framework for Investor Categorisation (Questions 7.1-7.3)
The Commission raises various questions about reforms to MiFID client categorisation, including the most appropriate approach to changing the current categorises (Question 7.1), how the qualification criteria might be amended for professional investors (Question 7.2) and whether current thresholds for clients that are companies might be reduced (Question 7.3.)
Inducements and Quality of Advice (Questions 8.1-8.11)
The Commission raises various questions about the current framework for inducements, including its effectiveness in protecting retail investors from receiving biased advice (Question 8.1), the impact of an inducement ban (Question 8.2), and the effectiveness of inducements rules for MiFID II and IDD distributed products, including via online platforms and comparison websites (Question 8.3.)
The Commission also raises questions about whether MiFID II and IDD inducements rules should be aligned (Question 8.4), how inducements should be regulated (Question 8.5), and the need for changes to the regulation of inducements received by brokers in return for payment for order flow (Question 8.6.) Furthermore, the Commission asks whether the best execution regime should be improved (Question 8.7) and whether a voluntary pan-EU label for financial advisers, in order to promote high-level common standards, should be developed (Question 8.8.)
The Commission raises various questions concerning robo-advisors, including whether they are regulated in a sufficient manner to protect retail investors (Question 8.9), why the use of robo-advisors hasn't taken off (Question 8.10), and how any unnecessary barriers hindering take-up can be addressed (Question 8.11.)
Addressing the Complexity of Products (Question 9.1 and 9.2)
The Commission highlights the complexity of certain financial products targeted at retail investors and raises various questions about how access to simpler products can be improved (Question 9.1) and the aims of reforms to address the complexity of products (Question 9.2.)
Redress (Questions 10.1-10.6)
The Commission notes the current complaints and redress procedures and raises questions about the importance of retail investors being able to access rapid and effective redress, in particular when investing cross-border (Question 10.1). Furthermore, the Commission asks whether the current requirement to publish a complaints process is sufficient (Question 10.2), whether retail investors know where to turn in case they need to obtain redress through an out of court procedure (Question 10.3), and whether such procedures are effective (Question 10.4.)
The Commission raises questions about the extent to which further efforts are needed to improve redress for retail investors on a domestic and/or cross-border basis (Question 10.5) and whether consumer redress is accessible to vulnerable consumers (Question 10.6.)
Product Intervention Powers (Questions 11.1-11.3)
The Commission highlights ESMA's existing product intervention powers and raises questions about whether these are sufficiently effective (Question 11.1), whether further convergence is needed in respect of the product intervention powers available to national competent authorities (Question 11.2) and whether the product intervention powers of the ESAs need to be reinforced (Question 11.3.)
Sustainable Investing (Questions 12.1-12.5)
The Commission notes retail investors' increasing awareness of environmental and social risks and the contribution they may make towards mitigating those risks by making more sustainable choices when investing and managing their savings. The Commission raises various questions targeted at retail investors, including the factors that are important to them when investing their savings (Question 12.1), and what help they need to take an informed decision as regards a sustainable investment (Question 12.2)
The Commission raises questions about the main factors preventing more sustainable investment (Question 12.3), whether detailed guidance for financial advisers would be useful for the implementation of sustainable investment measures (Question 12.4), and whether the current MIFID research regime needs to be reinforced to ensure ESG criteria are always considered (Question 12.5.)
Other Issues
The Commission invites comments on other issues that have not been raised in the consultation and that respondents think would be relevant to the future retail investment strategy (Question 13.)
Next Steps
Please provide any feedback on the consultation to me at giles.swan@ici.org. We will hold a member call on Thursday 10 June 2021 to discuss the consultation, after which a draft response will be circulated to members for comment. The Commission is accepting feedback on the consultation by 3 August 2021 and ICI Global intends to file a response by this date.
Giles Swan
Director of Global Funds Policy
ICI Global
endnotes
[1] Consultation Document: A Retail Investment Strategy for Europe, available from https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/2021-retail-investment-strategy-consultation-document.pdf
[2] Roadmap for a Retail Investment Strategy for the EU, available from https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12755-EU-strategy-for-retail-investors_en
[3] Capital markets union 2020 action plan: A capital markets union for people and businesses, available from https://ec.europa.eu/info/business-economy-euro/growth-and-investment/capital-markets-union/capital-markets-union-2020-action-plan_en
[4] European Commission Communication on a Digital Finance Package, 24 September 2020, available from https://ec.europa.eu/info/publications/200924-digital-finance-proposals_en
[5] https://www.esma.europa.eu/sites/default/files/library/jc_2021_13_letter_to_the_european_commission_priips.pdf