On Wednesday 24 May, the European Commission adopted its ‘Retail Investment Package’. This confirms the ambitions set out by the Commission in the draft proposal that we revealed on 10 May (see EUROPE 13178/20). Among other things, it aims to tighten the rules for advisers, encourage investment in sustainable finance and enable retail investors to make decisions that “match their needs and preferences”.
The package consists of an ‘omnibus’ directive, which plans to amend five existing pieces of legislation relating to markets in financial instruments (‘MiFID II’), insurance distribution (‘IDD’), undertakings for collective investment in transferable securities (‘UCITS’), alternative investment fund managers (‘AIFMD’) and the business of insurance and reinsurance and the conduct of their business (Solvency II). It also includes an amending regulation revising the regulation on packaged retail and insurance-based investment products (‘PRIIPs’).
In detail, the Commission’s proposal confirms that commissions for advisers, brokers and other intermediaries, paid by fund managers or insurers to have their products recommended, will not be prohibited. This ban was initially envisaged by the Commission, but the European Commissioner for Financial Services, Mairead McGuinness, announced on 27 April in Stockholm that she was abandoning it on the basis of the opinions collected from the industry.
“The possibility of a ban remains on the table. Working with professionals and regulators will lead to results”, said McGuinness. The proposal unveiled by the Commission provides for a revision clause three years after the entry into force of the text. At that time, the Commission could decide, on the basis of the data received by the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA), to finally ban these commissions.
However, commissions would be prohibited for sales in execution – i.e. ‘without advice’.
The ‘best interest of the customer’ principle reinforced
The ‘best interest of the customer’ principle applied in MiFID II and the IDD would also be reinforced.
These principles would be based on three criteria. “Advisers should first provide advice on an appropriate product mix. Among all these products, the adviser should propose the best ones, taking into account the costs of similar products. Finally, the adviser should at least offer a product that does not have additional features – such as additional life insurance within an insurance policy – and that would not meet the needs of investors”, explained a senior EU official.
Advisers should carry out a test to target precisely which products are most appropriate through a simple assessment. The legislative proposal also provides for the training of advisers to be strengthened.
Influencers in the crosshairs
One part of the proposal is dedicated to the protection of investors against misleading marketing practices, especially by influencers on social networks.
“Financial firms that engage the services of a financial influencer will need to take steps to ensure that the influencer complies with EU law. If not, they will have to suffer the consequences”, added a senior European official.
Companies using such services should keep records of the campaigns conducted. “If complaints are lodged at national level, the competent authority will be able to request records and obtain information on marketing campaigns”, the source added.
There are also changes to supervisory and governance rules to ensure that undue costs are not charged and that products offer value for money to retail investors.
Fines could be imposed on entities that do not comply with the rules. Their amount or nature would be defined by the national authorities. “This is a ‘nuclear’ option, but it could go as far as withdrawal of the licence to operate, in case of repeated violations of the rules”, said a senior European official.
In addition, the text provides for a relaxation of restrictions so that investors can qualify as professionals. The wealth criterion for a client to be identified as a professional would be reduced from €500,000 to €250,000.
First fracture lines in the European Parliament
The European Commission’s proposal, as soon as it was announced, revealed the first dividing lines within the European Parliament. The S&D side bitterly regrets the absence of a ban on commissions paid to councillors.
“This is a disappointment and a missed opportunity to ensure that financial markets work for citizens. It is also incomprehensible, as the Commission recognises that there is a serious problem of biased financial advice in the EU. Its own assessments clearly conclude that an EU-wide ban on commissions would be the most effective measure to end potential conflicts of interest and protect small investors”, said Eero Heinäluoma (S&D, Finnish). The socialist group has already assured that it will “continue to insist on a total ban on commissions”.
On the other hand, for Markus Ferber (EPP, German), “not banning incentives altogether was the right decision to make. The ban on commissions would have resulted in an advice gap for small investors who can hardly afford to pay high fees upfront”.
The treatment of the commission issue has also disappointed other stakeholders, such as the European Consumer Organisation (BEUC) or the European Federation of Investors and Financial Services Users (Better Finance). For the latter, this “specific and limited prohibition on ‘non-advised’ sales seems to apply de facto only to the small minority of products regulated by MiFID II”.
See the omnibus directive: https://aeur.eu/f/71q
See the amending regulation: https://aeur.eu/f/71r (Original version in French by Thomas Mangin)