What is the Retail Investment Strategy (RIS)?
In September 2020, the European Commission adopted the Action Plan for the Capital Markets Union (CMU). The plan states that these markets play a key role in the financing of European Union (EU) companies. But they remain fragmented, not transparent enough and ultimately under-invested by individual investors
In May 2021, the European Commission therefore launched a consultation entitled “A Retail Investment Strategy for Europe”. This is aimed at increasing the protection and interest of individual investors in order to sustainably improve their participation in the financing of the economy.
Improving the retail investor journey to encourage investment in Europe
The Commission notes that European retail investors have high savings rates. At the end of 2022, the savings rate of German households was over 20% and that of French households was over 17%. But their investments are still limited compared with their US counterparts.
The Commission has identified three main causes to explain the barriers to investment in EU financial products by European retail customers:
- A poor value-for-money ratio on many financial products for retail investors: the costs borne by individuals would be on average 40% higher than those borne by institutional investors.
- The difficulty in finding relevant, comparable, and easily understandable information for their decisions, as some communications may be unrealistic or even misleading.
- A conflict of interest between the players designing a product and the players in charge of its distribution, due to the retrocession (trailer fees) of the former to the latter.
- More than 60% of European retail investors now feel that the advice they receive is not in their interests.
In May 2023, the European Commission published its proposed strategy for retail investors (RIS).
The objective of the text is to restore investor confidence by enabling investors to make informed investment decisions in line with their expressed needs and preferences, while ensuring that they are treated fairly and are adequately protected.
Through the RIS, the Commission wishes to lay the foundations for cross-cutting European regulation of all investment products.
Features of the RIS legislative proposal
The legislative plan proposed by the Commission introduces targeted but important changes to the existing legislative framework. It comprises:
- An omnibus directive to:
- Amendment of specific directives:
- For the Markets in Financial Instruments Directive (MiFID) and Insurance Distribution Directive (IDD), the amendments concern:
- (i) investor protection (product governance, conflict of interest, professional requirements, single disclosure document, retrocession, adequacy to the investor’s preferences and risks)
- (ii) reporting and transparency requirements (information on costs and instruments, transparency on fees, transparency on remuneration terms, guidelines on fees, investor information terms).
The Commission’s objective is to align the rules for life insurance products set by the IDD with those set by MiFID, which governs other savings and investment vehicles.
- Solvency II: the amendments are designed to protect retail investors from deceptive marketing practices and to ensure responsible marketing communication by financial intermediaries.
- For the Markets in Financial Instruments Directive (MiFID) and Insurance Distribution Directive (IDD), the amendments concern:
- Amendments to the Alternative Investment Fund Managers (AIFMs) and Undertakings for Collective Investment in Transferable Securities (UCITS) directives: these aim to improve information provision and cost transparency, resolve conflicts of interest, and ultimately better protect investors.
- Amendment of specific directives:
- Amending regulation of Packaged Retail Investment and Insurance-based Products (PRIIPs). The modification is aimed at modernising the Key Information Document (KID). It adds two new sections entitled “The product in brief” and “How environmentally sustainable is the product?“. These strengthen communication on past performance, introducing a cost simulator to help compare products, and add new ways of making the KID available in electronic format.
The Retail Investment Strategy omnibus directive is structured around several goals:
- Products’ quality-price ratio, the objective is to increase their return for investors, by reducing certain costs and charges deemed excessive:
- Product governance rules are strengthened by imposing a control on the price-performance ratio of products in relation to benchmarks set by the European Securities and Markets Authority (ESMA). Products that deviate from the benchmarks should not be marketed. The benchmark comparison must be made at the start of the product and during its lifetime.
- Each new or existing product must identify and quantify costs (production, distribution and advice), fees and performance. New cost reports will therefore have to be implemented by the management companies to the ESMA or the European Insurance and Occupational Pensions Authority (EIOPA). In addition, retail investors will have to be reimbursed for unreasonable costs.
- Level 2 technical measures (Regulatory Technical Standards or RTS) should complement these points.
- The framework for financial incentives, with the objective to eliminate potential advisory biases by reducing the risk of conflicts of interest between retail investors and distributors, in particular those linked to remuneration schemes:
- Trailer fees for investment services without advice is prohibited, such as Receiving and Transmitting Orders (RTO) or selling without advice. The effects of these bans will be assessed three years after the directive’s entry into force, and this could eventually lead to a total ban on retrocession.
- Information provided to investors regarding payment of commissions.
- Information and communication rules are also strengthened in order to improve the overall transparency of products and the readability of the information provided to investors, by strengthening the dematerialisation of information exchanges:
- The requirement for a communication and business practice policy is introduced. Marketing communications must be clear, fair and not misleading, regardless of the channel through which they are distributed, whether directly by investment firms or indirectly (for example, through financial “influencers”)
- Information provided to investors is standardised and simplified, notably via the KID, in electronic format. In addition, investors will have to receive an annual statement of all the products to which they have subscribed, with details of the costs incurred and the performance achieved per product.
- Communication on the risk level of the product is strengthened with the obligation to include warnings for particularly risky products.
- Strengthening the suitability of the proposed product to the needs, interests or preferences of the individual investor. The following are now taken into account:
- The ability of the investor to suffer partial or total losses and the risk appetite of the investor. If the assessment is negative, the product cannot be offered to the customer unless they expressly requests it.
- Diversification of all investor portfolios on the basis of information provided by the investor.
The Retail Investment Strategy stresses the importance of maintaining high standards of professional qualifications for financial advisers against a climate of increasing offer and product complexity. By ensuring advisors have the necessary knowledge and expertise on an ongoing basis, the text aims to provide individual investors with access to competent professionals who can effectively guide them in their interests.
The RIS encourages Member States to implement measures that raise awareness and support the financial literacy of retail investors, including the risks associated with investment.
In order to improve accessibility to sophisticated retail investors, the Retail Investment Strategy relaxes the segmentation criteria between retail and professional investors. Thus, the threshold on financial assets is lowered from EUR 500K to EUR 250K and the assessment of the investor’s quality takes into account both experience and financial education.
This ensures that qualified retail investors have access to a wider range of investment products and services.
The RIS introduces an obligation to communicate information on cross-border activities, and allows the National Competent Authorities (NCAs) to restrict access to harmful websites and to carry out secret purchasing tests.
The text also strengthens the authority of the NCAs for more effective supervision and better coordination, with a likely increase in the frequency of checks carried out in coordination by these authorities.
Actors and financial products impacted by the Retail Investment Strategy
The legislative proposal directly impacts producers (asset managers, insurers, private and retail banks, investment banks) as well as distributors (insurers, and private and retail banks).
The products concerned are funds (AIFs or UCITS), life insurance products and structured products.
State of play and RIS next steps
The European Parliament voted on its compromise amendments to the legislative package proposed by the Commission. This vote on 23 April 2024 constitutes Parliament’s negotiating position.
On 12 June 2024, the EU Council adopted its own negotiating position.
These respective positions pave the way for inter-institutional negotiations (“trilogues”[1]) between the European Commission, the European Parliament and the EU Council, which will start in the last quarter of 2024, after the new Commission takes office.
Parliament and the Council take different positions on several key points in the text, including:
- Financial incentives: Parliament supports a ban on incentives for financial advisers, while the Council allows retrocession to be maintained in the context of execution-only sales, i.e., sales without advice.
In this case, however, the Council adds a set of enhanced guarantees to cover any potential conflict of interest (increased transparency requirements and measures to ensure an advisor act in the exclusive interest of the investor). - Value for money: Parliament is in favour of mandatory benchmarking exercises to guarantee value for money of the investment product, which means comparing the costs and performance of similar products with each other.
The Council opposes this obligation on the grounds that benchmarking is a tool reserved for supervision. Companies can compare their products with a peer group or supervisory benchmark developed by ESMA or EIOPA. - Product design and governance: Parliament expects stricter governance standards for financial products (in particular continuous product supervision) to ensure they are always adapted to the target market.
The Council agrees on the need to strengthen governance but takes a less strict approach.
The forthcoming negotiations will be instrumental in establishing a common position and thus finalising the RIS.
It is still too early to know when the final text will be adopted and published.
Initially, the date of entry into force of the text was expected in 2026. This timetable could be staggered depending on the duration of the “trilogue” negotiations
What are the RIS implications for financial players?
As mentioned above, the Retail Investment Strategy has a significant impact on both actors and products. Financial players strongly support the initiative to increase the participation of individual customers in financial markets. However, many also fear that the proposed changes will have negative consequences for individual investors, adding more regulatory burden to an already complex investment process.
The banning of retrocession for investment services without advice or the non-marketing of products that deviate from the benchmarks could also limit the range of products available to retail investors, highlighting the “cheapest” products. As it stands, the legislative proposal could threaten the ability of financial intermediaries to offer personalised and potentially more advantageous solutions to their customers. Small investors and SMEs would be particularly affected.
Securities Services’ view
We welcome these changes to strengthen investor protection, improve transparency and address conflicts of interest.
With this comprehensive package, the European Commission hopes to increase the participation of retail investors in European financial markets and thus contribute to the financing of the transition to a digital and sustainable economy.
However, the European institutions must strike the right balance to achieve this objective by avoiding a complex investment process and a potential reduction in the products and services offered to retail investors.
Retail Investment Strategy key dates
- September 2020: Adoption of the Capital Markets Action Plan by the European Commission
- May 2021: Consultation “A Retail Investment Strategy for Europe” published by the European Commission
- May 2023: RIS legislative proposal published by the European Commission
- April 2024: Adoption of the Parliament’s position
- June 2024: Adoption of the Council’s position
- Q4-2024: Expected start of negotiations between the Commission, Parliament and Council
- 2026: Date initially announced for the implementation of the Retail Investment Strategy (to be confirmed, depending on the duration of the dialogue negotiations)
Acronymes
- AIF: Alternative Investment Fund
- AIFMD: Alternative Investment Fund Managers Directive
- EU: European Union
- ESMA: European Securities and Markets Authority
- EIOPA: European Insurance and Occupational Pensions Authority
- IDD: Insurance Distribution Directive
- KID: Key Information Document
- MiFID: Markets in Financial Instruments Directive
- NCA: National Competent Authority
- PRIIPS: Packaged Retail Investment and Insurance-based Products
- RTO: Reception and Transmission of Orders
- RTS: Regulatory Technical standards
- Solvency II: European regulatory framework for insurance companies
- UCITS: Undertakings for Collective Investment in Transferable Securities
[1] Trilogue – EUR-Lex (europa.eu)
