What next for EU retail Investments?

The EU needs to rethink its approach to retail investments. That is according to a letter from ESMA and EIOPA addressed to the EU Commission and representatives of EU co-legislators in respect of the EU Retail Investment Strategy.

The EU Retail Investment Strategy (see our briefing here) launched with a bang and some confusion in May 2023. It set out proposals on disclosure rules, value for money in relation to investment products and sought to address potential conflicts of interest arising from inducements. The package — consisting of an Omnibus Directive amending MiFID and the IDD (amongst others) and a proposed Regulation amending the PRIIPs Regulation — has been proceeding through the EU legislative process. The European Parliament and the Council of EU have both agreed their negotiating positions.

Changes to the RIS text that the Council of EU proposed included:

• removing the proposed ban on "inducements" received for execution-only sales;
• introducing "overarching principles" to be observed when paying or receiving inducements;
• requiring the ESAs to develop EU supervisory benchmarks (these would not be mandatory benchmarks integrated in the product governance process of a manufacturer/distributor, but would be a supervisory tool allowing NCAs to detect investment products failing to offer value for money); and
• national benchmarks on costs and performance to detect outliers

Changes to the RIS text that the European Parliament proposed included:

• removing the proposed ban on receipt of inducements for "execution-only" services;
• replacing the designed to enhance criterion in respect of inducements (in line with the EU Commission's proposal) with another test on how financial advisors should apply the principle of acting in the best interest of the client/customer (advice to be based on an appropriate range of financial products suited to the client’s/customer’s needs); and
• requirement for an investment firm manufacturing a PRIIPs to carry out a peer review of products with competitors.

The letter from the ESAs is against the backdrop of increased attention in relation to the future of the Capital Markets Union/the so-called European Savings and Investments Union. The letter refers to one paper which called for a "simple and effective cross-border investment/savings product for retail investors" and for pensions and long-term savings products to be developed. ESMA's May 2024 position paper set out similar recommendations. EIOPA also issued a Staff Paper on the future of the European Pension Product. The report on the future of European competitiveness called for mobilising private and public finance at scale.

The ESAs are now calling for the Commission to complement the RIS with proposals incorporating some of these recommendations to prevent multiple revisions of the retail investment framework in a short period of time and thus improve regulatory stability.

Other key points in the letter:

• The ESAs support the European Parliament's proposal to introduce an online comparison tool for PRIIPs (setting out information on performance, guarantees, costs and fees charged).
• The ESAs have some concerns about amendments (e.g. national benchmarks intended to serve the sole purpose of identifying outliers in the market) that have been made to the RIS text by the EU co-legislators and think that these could undermine the effectiveness of the RIS proposal.
• The ESAs underline the importance of a timely and efficient supervision of cross-border business through supervisory collaboration platforms, and express concerns about a change requiring a request by at least two Member States to establish such platforms, which echo the recommendations in the ESMA's May 2024 position paper that supervisory consistency amongst EU supervisors should be prioritised, and further centralisation of supervision at EU level should be evaluated.

Trilogue negotiations between the parties in respect of the RIS are expected to start early 2025, with a view to agreeing a final version of the text. All that can be said at this point is watch this space and how both the EU legislators and the NCAs may react.

Co-author: Bisola Williams, Expertise Legal Manger