On Thursday morning, Parliament and Council negotiators agreed on a series of changes to several EU directives with the overall aim of reinforcing investor protection rules, addressing retail customers participation in capital markets, and reducing dependence on bank loans especially for smaller companies.
Investment advice in clients’ best interests
According to the draft legislation agreed, financial and insurance advisors must ensure that the financial or insurance products and services they provide are suitable for their clients’ needs. Suitability must be assessed using proportionate and necessary information about the client, including their knowledge and experience, financial situation, ability to bear full or partial losses, investment needs and objectives, and risk tolerance.
Value for money and comparable financial products
Co-legislators agreed to prevent products that do not offer value for money from being released onto the market and sold to retail customers, who should be also able to compare investment products’ costs, charges, performance and non-financial benefits.
To facilitate comparison of insurance-based investment products, the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA) should develop supervisory benchmarks (a statistical measure, calculated from a representative set of data) These benchmarks can be used by national competent authorities (NCAs) as a reference for supervising value for money.
In addition, investment firms would be required to assess the value for money of their products against peer groups that include a representative number of similar financial instruments.
Inducements
Inducements from third parties (i.e. incentives received by an investment firm from other firms providing services) can act in the best interests of a client if they enhance service quality (such as research, tools, or training) and if conflicts of interest are mitigated. To this end, negotiators agreed on a new inducement test to ensure that investment and insurance companies act in the best interests of clients and to enable clients to distinguish inducements from other fees.
Financial literacy and “finfluencers”
EU countries will have to promote measures that support the financial literacy and financial education of customers on the responsible purchase of investment and insurance products. Where appropriate, these measures should address the needs of specific age groups and other target groups.
As younger clients are likely to be more vulnerable to mis-selling online amplified by influencers or social media, MEPs ensured that such activities must be supervised. Where investment firms use services of so-called financial influencers to promote financial products or contracts, firms should have a written agreement with them, their contact details and control over their activities.
Update of information documents
Negotiators made changes to the key information document (KID) for packaged retail and insurance-based investment products (PRIIPs). The KID would provide meaningful, forward-looking performance scenarios based on realistic data and plausible assumptions.
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Stéphanie Yon-Courtin (Renew, FR), lead MEP, said: “With today’s agreement on the retail investment strategy (RIS) we celebrate a major step towards savings and investment union. These rules bridge the gap between protecting consumers and helping businesses thrive in Europe. The agreement last night on the RIS scores majors wins for consumers and businesses alike. We are adapting to a more digitalised environment. Companies will move to digital-by-default disclosure for consumers, while consumers will be better protected against new risks emerging from online advice practices, such as financial influencers: no more getting rich from risky new financial products without accountability.
As Europeans invest mainly on the basis of advice, we focused on preventing abuse while keeping advice accessible, both financially and geographically. Supervisors will meanwhile have stronger tools to look at how products are priced, how advice is delivered, and whether consumers are truly getting value for money.
This agreement moves savings and investment union from theory to reality. It has been an honour for me to lead this file in the European Parliament. And while the final vote still lies ahead, today our message could not be clearer: Europe is serious about savings, investment and growth.”
Next steps
The provisional agreement now needs to be approved by both Parliament and Council before the new rules can enter into force.
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