The European Commission adopted the Retail Investment Strategy (the “RIS”) on May 24, 2023, as part of its Capital Markets Union 2020 action plan. The proposed measures aim to enhance retail investors’ trust in the markets and help them achieve better investment outcomes.
To achieve this while streamlining and modernising a wide range of existing regulations (MiFID II, PRIIPs, UCITS, AIFMD, IDD, Solvency II), the Commission has published a proposed Omnibus Directive which will aim to enact consistent and uniform requirements for all relevant sectors of the EU Capital Markets Union.
The European Commission has highlighted eight objectives and proposals to address these issues:
- Modernise disclosure rules for investment products and services to make them more accessible and understandable for investors, especially in the digital age and about sustainability preferences.
- Ensure investment products bring real “value for money” for retail investors by developing benchmarks to assess the value of financial products.
- Ensure that financial advice is aligned with retail investors’ best interests by banning or reducing the scope for inducements in product distribution.
- Ensure that financial advice better meets the needs and objectives of retail investors by ensuring financial advisors adequately and carefully assess retail investors and their financial situation.
- Protect retail investors from misleading marketing, including on social media, by ensuring marketing is fair, clear, and not misleading in the digital age.
- Boost financial literacy so retail investors ask the right questions to make better decisions and improve the consistency of certification for financial advisors across all products.
- Reduce administrative burdens and improve accessibility for sophisticated investors by reforming the eligibility criteria for professional investors.
- Ensure that rules are properly and effectively applied coherently across the EU and encourage enhanced supervisory cooperation between National Competent Authorities (NCAs).
At Delta Capita, we understand that product manufacturers must maintain the highest standards of quality and performance to protect their customers and their brand. That is why we have a dedicated product governance and oversight team who are focused on all aspects of the governance lifecycle, covering retail and institutional cross-asset businesses. We have worked at the centre of the Structured Product regulatory change landscape by providing our clients with advisory work on PRIIPs, MiFID II, ESG, and Consumer Duty and have both established and benchmarked multiple investment bank governance frameworks.
As well as recently focusing on the UK’s Consumer Duty implementation, we actively track global regulatory introductions and amendments such as the European Union’s proposal of the RIS. The RIS will present a range of challenges for firms operating in the EU, but it is important to be proactive in understanding and complying with the new requirements as they are finalised. It is also important to note that the 2024 European Parliament elections have the potential to significantly delay the implementation of the RIS.
While comparisons are to be drawn between aspects of Consumer Duty and the RIS, the reality is that there will be a regulatory divergence that manufacturers operating in the UK and EU will have to consider.
One such example is that there are early indications from the EU that there will be significant divergence from the UK in what is considered “value” for a retail consumer and how that is calculated. The FCA will not be prescriptive in their approach to determining value, meaning it will not be setting prices or bands for firms to align to. However, benchmarks will be set by ESMA and EIPOA with the assumption that a deviation from the benchmark would imply that the costs and charges of the product are too high and therefore will not deliver value for money.
The public consultation period ended on August 28, 2023, and following this, the rule-making process will commence in the Autumn. Delta Capita expects the proposed RIS to notably change during this process, but it will certainly have a significant impact on retail investors in the EU and, by extension, on the various market participants that engage with investors in the region. We look forward to seeing what the changes require and assisting our clients in responding to the new regulation.
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