The functioning of retail financial services is under review.
The debate is set against the need to encourage greater private investment to aid economic recovery, and the ongoing regulatory focus on costs and value.
The European Commission's June 2021 Staff Working Paper (PDF 1.7 MB) on monitoring progress towards a Capital Markets Union (CMU), says that, on average, EU households have a high saving rate but barely invest directly in equity and bond markets. The pandemic has resulted in a significant increase in households' deposits and a more moderate increase in securities holdings. Other encouraging signs include declining costs for individuals to invest via UCITS and the emergence of green investment vehicles and digital platforms. The Commission notes, however, that private investment by households remains too low and that new risks such as “greenwashing” and highly volatile prices of certain crypto instruments may discourage market participation in the longer term.
One of CMU's aims is to ensure a safer place for individuals to save and invest. The Commission has set out a series of indicators, against which it will assess the success of CMU in this regard. The indicators include the proportion of households that hold investments of various sorts and total amounts of those investments relative to cash holdings and deposits. They also include ongoing charges in equity UCITS, issuance of green bonds, and credit and equity through crowdfunding.
EU Retail Investment Strategy
The Commission is consulting until 3 August 2021 on a wider review of the EU retail distribution landscape. The findings are expected in early 2022 and are likely to influence the MiFID II review and introduce further changes to product disclosure rules. The Commission observes that investor protection rules are spread across different sector-specific legislation and are inconsistent. It says that cumulative requirements on disclosures lead to information overload or leave out important information. Financial advice may be biased towards products with higher inducement payments, which raises questions about the effectiveness of the suitability requirement.
The Commission also says that EU legislation should be forward-looking and reflect ongoing developments in digitalisation and sustainability, as well as the increasing need for retirement savings. Individual investors should benefit from:
- Adequate protection
- Bias-free advice and fair treatment
- Open markets, with competitive and cost-efficient services and products
- Transparent, comparable and understandable product information
The consultation is wide-ranging, focuses more on supply than demand, and covers various rules, including MiFID II, UCITS, the Insurance Distribution Directive (IDD), the PRIIP KID and the pan-European Personal Pension Product (PEPP). It seeks views on which areas might be improved most to increase investor protection, which factors discourage or prevent retail investors from investing, and the characteristics of products available to EU retail investors (e.g. accessible, understandable, comparable and competitively priced). Topics include:
- Horizontal review of disclosure documents
- Suitability assessment and appropriateness
- Investor categorisation
- Increased transparency on and further limiting of inducements
- Potential certification requirements and a pan-EU quality label for financial advisers
- Simple, transparent and cost-efficient products versus “complex” products
- Protecting retail investors better against speculative bubbles
Costs, value and disclosures
ESMA's third annual report (PDF 2.5 MB) on the cost and performance of EU retail investment products found that retail fund investors continue to pay on average 40 percent more than institutional investors, and that the performance of actively-managed UCITS does not compensate for higher charges.
EIOPA is consulting on a framework to address value for money risk in the EU unit-linked insurance market. It notes that while unit-linked products offer important benefits for policyholders, costs for some products remain too high. Existing concerns have been heightened by the impacts of the pandemic: a low interest rate environment, market shocks and the risk that households will need increased access to liquidity. EIOPA considers that reliably putting consumer outcomes at the heart of product design, distribution and monitoring processes is critical for tackling value for money issues:
- Value should be assessed by considering the product as a whole, as well as each component
- Product testing should assess the product's features and characteristics, including costs and the reward profile, vis-à-vis target market characteristics, objectives and needs, and ensure no “undue” costs
- Products that are difficult for consumers to understand should have more granular target markets and adequate measures in place
The Commission has said it intends to endorse the ESAs' proposed revisions to the PRIIP KID, for implementation by mid-2022, and to extend the UCITS exemption to mid-2022. The UK will legislate to extend the UCITS exemption for five years, to end-2026, while the UK retail disclosure regime is reviewed. Rule changes are expected before that deadline, but there will likely be disconnects with the new EU rules and the mid-2022 deadline. Meanwhile, UK closed-ended funds will have to continue to issue current PRIIP KIDs.
Duty to customers
The general instruction to act always in the customer's best interests may come under renewed scrutiny as part of ongoing EU legislative reviews. In the UK, the FCA is consulting on the introduction of a new consumer duty. New overarching rules will seek to achieve good outcomes across the firm-customer relationship: communications, products and services, customer services, and price and value.
For further thoughts, see:
Regulating the new reality - Emerging retail conduct risks.