The current investment protection framework is made up of rules spread across a number of different EU legal instruments (such as MiFID II, IDD, PRIIPs, UCITS and the AIFM Directive). Even though they aim to harmonise the standards and create an integrated financial market, in which investors are effectively protected and the efficiency and integrity of the overall market are safeguarded, the level of retail investor participation in the capital markets remains very low. According to the EU Commission (EC), in 2021 around 17% of the assets owned by households in the European Union were invested in financial securities. This percentage is significantly lower compared to the proportion of assets that American households have in similar financial instruments, which stands at 43%.
In addition, the recent market developments and the accelerating changes in the financial market driven by technological innovation have significantly impacted the retail investors and increased the need for a review of the current legislative framework.
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:
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:
There are new criteria for retail clients to opt into professional clients as follows:
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:
The changes focus on:
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:
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.
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.
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.
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.
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.
Mark Staempfli