Brussels, 12 June 2024
The EU Council today reached an agreement on strengthening the EU’s rules on retail investor protection. The retail investment package aims to support individual consumers who wish to invest on the EU’s capital markets, by better protecting their investments, providing them with clearer information about investment products and ensuring more transparency and disclosure.
Stronger retail investments rules will give citizens the tools they need to make sound investment decisions on the EU’s capital markets at every step of their way. We need to get savings flowing into innovative European companies, including the small and medium-sized enterprises (SMEs) that are the backbone of Europe’s economy and that need to attract more private investment. These rules will contribute to deepening the capital markets union by increasing consumers’ trust in capital markets and channelling private funding into our economy.
Vincent Van Peteghem, Belgian Minister of Finance
The retail investment package aims to offer retail investors the same level of information, treatment and protection regardless of which investment products, marketing and distribution channels they use. To this end, the package aims to modernise and simplify investor protection rules so that they are coherent across the different sectors and EU laws.
With this agreement, the Council is ready to engage in negotiations with the European Parliament on the final shape of the legislation.
Main changes proposed by the Council
Inducements
In its position, the Council decided to remove the proposed ban on ’inducements’ (often referred to as “commissions” or “retrocession fees”) received for execution-only sales (where no advice is provided to the investor). A ban is already in place for independent investment advice and portfolio management with limited exceptions.
At the same time, in order to reinforce the prevention of potential conflicts of interest, the Council strengthened the safeguards accompanying all inducements with:
- an inducement test that applies where there is no ban on inducements
- a new uniform test specifying the duty for advisors to act in the best interest of the client
- enhanced transparency and disclosure about what payments are considered as inducements, their costs and their impact on investment returns
In addition, the Council further reinforced the safeguards by introducing ‘overarching principles’ to be respected when paying or receiving inducements. These overarching principles are not part of the inducement test as such, but firms should respect those principles at all times when paying or receiving inducements to or from a third party, and be able to demonstrate this to national competent authorities.
According to these overarching principles, inducements should not incentivise firms to recommend particular products over others, they should not be disproportionate to the value offered and inducements paid to or accepted and retained by entities belonging to the same group should be treated in the same way as others.
Member states that already have inducement bans in place, that would decide to introduce such bans in the future or that apply or would decide to apply stricter requirements in relation to inducements as provided for in EU legislation, would be allowed to do so, according to the Council mandate.
The Council agreed to review the provisions on inducements five years after the entry into force.
Value for Money
The package introduces a new concept of ‘Value for Money’ to ensure that investment products are offered to retail clients only if they offer good value for money.
Under the new rules, manufacturers and distributors would assess whether costs and charges related to a product are justified and proportionate with regard to their performance, other benefits and characteristics, their objectives and, if relevant, their strategy.
The Council agreed that the European supervisory authorities European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pensions Authority (EIOPA) would develop Union supervisory benchmarks. However, instead of mandatory benchmarks integrated in manufacturer’s and distributors’ product governance process, they would be a supervisory tool, developed in a way that helps national competent authorities detect investments products that fail to offer value for money.
Since benchmarks used as supervisory tools would not be directly binding on manufacturers and distributors, the Council also agreed to strengthen their product governance process with a peer group system.
Manufacturers and distributors would compare their investment products to a peer group of other similar investment products in the EU to establish whether the investment product offers value for money.
The comparison would be based on information contained in databases managed by ESMA and EIOPA.
The Council also proposes to allow member states to provide for a possibility for financial products manufacturers or distributors to opt, for the purpose of the market comparison in its value-for-money assessment processes, to compare their products with the relevant Union supervisory benchmark, instead of a peer group.
Finally, the negotiating mandate would also allow those member states whose national competent authorities have developed, before 1 July 2024, national benchmarks on costs and performance to detect outliers, to decide to continue to use those national benchmarks but only in relation to insurance-based investment products.
According to the Council position, the value for money framework would be reviewed seven years after the start of application of the framework.
Next steps
The European Parliament agreed on its negotiating mandate on the Regulation amending PRIIPs on 11 April 2024 and on the Omnibus Directive on 23 April 2024. Today’s agreement paves the way to starting interinstitutional negotiations.
Background
The European Commission submitted its proposal for a retail investment package on 24 May 2023 as part of measures that intend to deepen the capital markets union (CMU), which aims to complete the single market for capital. The package includes two legislative proposals:
- a proposal for an Omnibus Directive amending the Markets in financial instruments Directive (MIFID), the Insurance distribution Directive (IDD), Solvency II, the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive and Alternative Investment Fund Managers Directive (AIFMD)
- a proposal for a Regulation amending the PRIIPs (Packaged Retail and Insurance-based Investment Products) Regulation.
For the moment investor protection and information rules are set out across sector specific laws (like the Markets in financial instruments Directive (MIFID), Solvency II and the Alternative Investment Fund Managers Directive (AIFMD)) among others).
The package sets out to impose the same transparency and information requirements across the board of EU legislation to avoid overlaps. At the same time it will adapt the legislation to the digital environment and new preferences.
This covers among other things adapting disclosure rules, ensuring that investment products bring real value for money to retail investors, address potential conflicts of interest due to inducements, addressing misleading marketing, preserving high standards of qualifications for professionals, and enhancing supervisory cooperation to ensure that rules are properly applied across the EU.
On the other hand, the package will adapt provisions on regulatory disclosures and make targeted changes to adapt the Key Information Documents (KIDs – documents that provide details on the investment products and their performance).
More disclosure and clearer KIDs will help private investors better understand the product they are buying and compare it with other products by making key information on costs and risks clearly visible in the document they receive when they purchase certain investment products. In addition, it will be easier to access digitally and offer more legal clarity.
- Council negotiating mandate on the retail investment package – Omnibus Directive
- Council negotiating mandate on the retail investment package – PRIIPS Regulation
- What the EU is doing to deepen its capital markets (background information)
Source – EU Council