On 2 August 2022, the European Commission published a final report which it produced in May concerning the findings from a study that examined disclosure, inducements and suitability rules for EU retail investors. The study feeds into the development of the Retail Investment Strategy announced earlier this year, being one of the actions planned under the Capital Markets Union (CMU) Action Plan. The aim of the Retail Investment Strategy is to respond to new challenges in the market, such as increasing digitalisation of investment advice and the use of digital distribution channels.

Key findings in the final report

 In terms of disclosure the final report notes that:

  •  Rules do not focus on making documents engaging. Disclosure does not overcome complexity and is not focussed on encouraging choice.
  • The requirements for format, readability, clarity, conciseness, language use and comprehensive coverage are coherent. Additionally, risk calculation methods are coherent and consistent.
  • There is a legal gap in the understanding of “in good time” which poses practical challenges for the timing of disclosure. Furthermore, a stronger focus on digital disclosure overall would make the legal framework more future proof. Coherence of cost disclosure is lagging behind and renders comparison of product costs more complicated.
  • Documents are not systematically handed out during first contact. Reading of the document is encouraged in only half the cases.
  • For complex products that people are not familiar with, disclosure documents do not make it easier to identify the most advantageous product.

As for inducements and advice the final report notes that:

  •  Disclosure of inducements is not directly relevant for consumers’ choice and the extent to which they question or not advice received.
  • The focus on cross-border standardisation diminishes the burden on businesses (distributors) and allows consistent consumer protection in the EU. However, limitations regarding effectiveness also mean that the EU added value is somewhat diminished.
  • Overall, products recommended to mystery shoppers were aligned with their level of wealth and investment objectives. However, information on inducements is hard to locate in the information documents and is not systematically given during client conversations.
  • The administrative burden associated with the costs of training of advisors primarily is reasonable compared to consumer benefits. However, the fact that inducement costs are associated with higher product costs being charged to clients suggests that clients are not necessarily benefiting from the optimal products in terms of the costs charged to them.

As regards suitability assessments, demands and needs tests the final report finds that:

  •  Good quality questioning does not guarantee quality of advice. When screening is done late its relevance diminishes.
  • The standards on the application of the suitability and the appropriateness assessment are largely identical. Although there are some differences in national frameworks these do not result in inconsistencies.
  • Investors recall undergoing screening and found the process as well as the output useful. However, systemic screening of customer’s profiles is not systematically done in the initial stage of contact. Rather than informing the advice, it is relatively frequently done at the last stage prior to contact signature and thus not informing product recommendations or choice. Furthermore, the quality of screening and questioning varies greatly.
  • Cost effectiveness is only positive if advice provided is tailored and of quality. If clients undergo excessive screening in the phase when searching for products, the costs per client increase rapidly as each screening adds a maximum of thirty euros.