As part of its 2020 Capital Markets Union (CMU) Action Plan, the European Commission (Commission) has been working on a retail investment strategy. The Commission’s aim is to empower retail investors to take more informed investment decisions that would better correspond to their investment needs and objectives. Following a public consultation conducted in May 2022, the Commission is due to publish a legislative proposal on 24 May 2023.
NRFLLP understands that the legislative proposal will amend the following pieces of EU legislation:
- Markets in Financial Instruments Directive (2014/65/EU) (MiFID II).
- Alternative Investment Fund Managers Directive (2011/62/EU) (AIFMD).
- Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EC) (UCITS).
- Directive on the provision of insurance or reinsurance distribution services to third parties (2016/97/EU) (IDD).
- Directive on the taking-up and pursuit of the business of Insurance and Reinsurance (2009/138/EC) (Solvency II).
In addition, a proposal for a Regulation amending the Regulation on key information documents for packaged retail and insurance-based investment products ((EU) 1286/2014) (PRIIPs) will be published on the same day.
In terms of specific amendments made to MiFID II, NRFLLP understands that the Commission will propose, among other things, the amendments discussed below. Please note that these proposals can change and may differ from those which the Commission will publish on 24 May 2023.
- Risk warnings
The Commission proposes to require investment firms to display appropriate risk warnings in all information materials concerning particularly risky products, in order to alert retail investors to specific risks of potential financial losses.
- Marketing communications:
The Commission will introduce a number of requirements regarding marketing communications. Investment firms will be required to have a policy on marketing communications and practices, which needs to be defined, approved, and overseen by the management body. Effective organisational and administrative arrangements should be put in place to ensure compliance (Art. 1(6) and 1(7)). A new Article 24c MiFID II includes obligations to clearly identify marketing communications and to ensure that they are appropriately attributed to the investment firm on whose behalf they are made. Essential characteristics of the investment product or service should also be clearly presented in all marketing communications. The provision also includes a division of responsibility with respect to the content and use of marketing communications between manufacturers and distributors of investment products.
- Client categorisation
The Commission will propose to amend the identification criteria for clients that may be treated as professional clients on request by lowering the wealth criterion from EUR 500,000 to EUR 250,000 and insert a fourth criterion relating to relevant education or training. Legal entities would also be able to qualify as a professional client on request by fulfilling certain balance sheet, net turnover and own funds criteria.
- Personal recommendations
The Commission will propose to amend MIFID II to ensure that retail investor protection requirements cannot be contractually circumvented by investment firms where they provide personal recommendations at their own initiative.
- Costs and charges disclosures
NRFLLP understands that the proposal will introduce a new Article in MiFID II on costs and charges disclosures. This new Article would move the existing provisions on cost and charges disclosures under Article 24(4) of MIFID II to the new Article and standardise the presentation of cost and charges information. With regards to third party payments, the new provision would also require investment firms to explain the purpose of such payments and quantify their impact on expected returns, in a standardised and comprehensible manner. All investment firms must provide their retail clients with an annual statement on costs and charges.
A ban on inducements paid from manufacturers to distributors in relation to the reception and transmission of orders, or execution of orders to or on behalf of retail clients is expected to be introduced by the Commission. This proposed ban includes inducements for execution-only sales. However, the ban is not expected to be applicable to situations where investment firms provide advice relating to the same transaction or in relation to fees or remuneration received or paid from an issuer for placement and underwriting services. Minor non-monetary benefits not exceeding EUR 1,000 or of a scale and nature such that they could not be judged to impair compliance with the duty to act in the best interest of the retail investor would also be allowed, under the condition that they are clearly disclosed. NRFLLP understands that a full ban on all inducements, which has been on the table but generated a lot of public debate, will not be part of the Commission’s proposal.
- Quality of advice
The Commission will introduce a new test replacing the “quality enhancement” test to ensure that investment firms act in accordance with the best interest of their clients and customers. Under the new test, financial advisors must (i) base their advice on an assessment of an appropriate range of financial products; (ii) recommend the most cost-efficient financial product from that range; and (iii) offer at least one financial product without additional features which are not necessary to the achievement of the client’s investment objectives.
The Commission’s proposal will require investment firms to explain the purpose of their assessment of appropriate financial products to their retail investors in a clear and simple manner. They must also obtain all relevant information from such investors which may be necessary and proportionate for these assessments. In addition, the proposal will introduce the possibility for independent advisors to provide advice although this will be limited to a sufficient range of diversified, non-complex and cost-efficient financial instruments.
As discussed above, the Commission will publish its legislative package on 24 May 2023. It is expected that the European Parliament and the Council will need at least one year before they can reach a common position on the Commission’s proposals. The legislative process may be delayed significantly as a result of the European Parliament elections, which will take place in May 2024.