EU Retail Investment Strategy puts forward significant proposals which mirror concepts from the UK Consumer Duty

The Commission’s legislative proposals on the Retail Investment Strategy (published on 24 May 2023) suggest a significant overhaul of EU MiFID II, Insurance Distribution Directive, UCITS Directive, AIFMD and Solvency II in order to address a wide variety of issues along the retail investor journey and to grow retail investor participation in capital markets. 

It is hard to pick one key proposal from a high-profile list of changes which include new “value for money” requirements for manufacturers and distributors of investment products, significant changes to the EU inducement rules (including a new ban for firms providing execution-only services to retail investors and changes to the quality enhancement requirements), proposals to introduce mandatory cost disclosure templates, the re-introduction of detailed cost and charges disclosures for eligible counterparties and professional clients (thereby undoing the helpful MiFID quick fix reforms), further regulation around marketing communications (which mirror the UK’s financial promotions and recent high-risk investment regimes), helpful relaxations to the elective professional client tests, and changes to existing suitability and appropriateness requirements. These changes are largely set to align across the whole breadth of EU financial services sectoral legislation. 

The reforms also include proposals that don’t appear to be strictly speaking retail focussed – most notably, the proposals appear to reintroduce detailed cost and charges disclosures for eligible counterparties and professional clients. The proposals also look to tighten the oversight of EU firms providing cross-border services into other EU countries, as well as the oversight of overseas firms targeting investors in the EU through digital means without appropriate licenses.

Overall, the proposals (if enacted) would be very impactful for the industry. In particular, the ban on inducements for execution-only services will require manufacturers and distributors to revisit distribution fee models. The value for money proposals, although now well entrenched in the UK, also look to be very burdensome and formulaic – as unlike the UK’s outcomes focussed rules, the EU is looking to introduce an “objective” value assessment whereby product manufacturers and distributors will have to assess value by comparing the performance and costs of their products against certain costs and performance benchmarks set by the EU authorities (and a product that doesn’t align with the benchmark will be presumed to not offer value for money, unless further assessments show otherwise).

There are however some helpful relaxations of existing rulesets – including a suitability-lite regime for firms providing independent advice on a limited range of non-complex products and helpful relaxations to the opt-up criteria for elective professionals.

As part of its package of proposals, the Commission has also published complementary proposals to make targeted changes to the PRIIPs Regulation, which include a move to an ‘electronic by default’ approach to the PRIIPs KID, and the introduction of a new dedicated section in the KID focused on sustainability.

Read our summary note of the key RIS and PRIIPs proposals via the Linklaters Knowledge Portal.