Retail Investment Strategy (RIS) is coming!

Following the 2020 capital markets union (CMU) action plan, the European Commission (EC) issued a Roadmap for Retail Investment Strategy. The objective of the strategy is to ensure a coherent regulatory framework that empowers consumers to take financial decisions and benefit from the internal market. 

On 24 May 2023, the EC adopted the Retail Investment Strategy and published the Retail Investment Package that places the consumer’s interests at the centre of retail investing. The RIS package includes two main components:

1. The Omnibus Amending Directive revising several directives, including the Markets in Financial Instruments Directive (MiFID II), the Undertaking for Collective Investment in Transferable Securities (UCITS) Directive, the Alternative Investment Fund Managers Directive (AIFMD), the Taking-up and Pursuit of the Business of Insurance and Reinsurance Directive (Solvency II) and the Insurance Distribution Directive (IDD).
2. A proposal for targeted amendments to the PRIIPs Regulation (the ‘Amending Regulation’).

By mid-June 2024, primarily political consent had been achieved. Although the exact timeline on the MiFID II RIS is not yet fully clear, the following is planned:

• Trilog negotiations: Q4/2024–Q1/2025
  
• Expected consensus: end of Q1/2025
• Expected publication in the OJ: Q3/2025
• Applicability as of 2027

New client classification

There are new criteria for retail clients to opt into professional clients as follows:

• The criterion with respect to the client portfolio is reduced from EUR 500,000 to EUR 250,000.
• The criterion with respect to experience has been amended to also cover clients who have ‘undertaken capital market activities requiring the buying and selling of financial instruments and/or the management of a portfolio of financial instruments’ (encompassing, for instance, financial directors of industrial companies).
• A new (fourth) criterion is added with respect to clients with ‘recognised education or training that backs up his/her understanding of the relevant transactions or services envisaged and his/her ability to adequately evaluate the risks’.

Ban on execution-only inducements

No full ban on inducements, but the introduction of restrictions, safeguards and increased transparency requirements in relation to inducements as well as safeguards relating to advice. In particular:

• Banning inducements for sales of investment products where no advice is provided.
• For sales where advice is provided, replacing the current criteria with a new uniform test specifying the duty for advisors to act in the best interest of the client (new three-fold ‘best interest’ principle).
• Where inducements are permitted, requiring distributors to inform clients about what inducements are, as well as their costs and impact on investment returns (enhanced disclosures).

Individual information to retail investors 

The changes focus on:

• modernising disclosures for digital distribution
• modernising and standardising cost disclosures to improve transparency for retail investors
• introducing annual statements for cost and investment performance clarity
• introducing mandatory risk warnings for appropriate investment choices.

Changes to general disclosure rules 

Several changes to the PRIIPs Key Information Documents (KID) to make them more suitable for the evolving investor needs and use on digital devices and to increase legal clarity.

Notable changes include: 

• a summary dashboard
• flexibility for digital display (i.e. use of layering)
• new sustainability section
• adapted rules for the presentation of key information on multi-option products (MOPs).

Measures to improve value for money

Introduction of a new pricing process to be integrated into manufacturer and distributor product governance frameworks. Also, manufacturers and distributors should be required to make a comparison of the cost and performance of a product against wider benchmarks.

ESMA and EIOPA have a mandate to develop, make publicly available and regularly update cost and performance benchmarks for comparison. Investment firms, insurance undertakings and insurance intermediaries must report distribution costs to national competent authorities.

Assessing appropriateness and suitability 

For the suitability assessment, investment/insurance advisors and portfolio managers will also need to assess portfolio diversification (i.e. new element). For the appropriateness assessment: the list of elements to be considered in an appropriateness assessment is expanded to include the ability to bear full or partial losses and risk tolerance. 

Marketing communication of investment opportunities

Enhanced requirements exist for fair, clear and non-misleading marketing advertisements of financial securities. Besides that, investment firms are liable for marketing done on their behalf and are responsible for the content and compliance of marketing communications. There is a new requirement to keep records of all marketing communications and strategies about marketing practices.

Management bodies will become responsible for and receive reports on a firm’s marketing activities. Competent authorities have new enforcement powers, including the ability to suspend or prohibit marketing communications or practices. 

Financial literacy and advisors’ competences

Increasing financial literacy in the EU is a key priority under the 2020 CMU action plan. The goal is to empower citizens to make informed financial decisions, particularly for long-term planning like retirement, without needing to become finance experts. The RIS encourages Member States to enhance financial education for retail investors, supplementing the Commission’s existing initiatives and joint efforts with the OECD to develop financial competence frameworks. Additionally, the RIS proposes improving the qualifications of financial advisors and reducing administrative burdens for sophisticated investors by adjusting eligibility criteria and monetary thresholds.

The Retail Investment Strategy will result in significant changes of existing regimes and will impact the whole retail investment journey. Since it also touches upon areas of client classification, information to clients and suitability aspects, there will also be an IT impact. 

How can we support you?

Taking into account the timeline, it is recommended that each financial service provider now assesses the impact on their own organisation. PwC offers a comprehensive suite of services designated to assist your organisation in navigating the complexities of the forthcoming regulatory changes brought by the RIS. With the draft directive in circulation and the market’s response evolving, it is critical to engage in proactive measures to ensure compliance and strategic alignment. Our services are tailored to guide you through the necessary stages of awareness and impact assessment, gap analysis and action plan, and implementation.

If you need support, please contact our experts at PwC.