Where does the EU Retail Investment Strategy stand?

Retail investors often struggle with accessing comprehensible and comparable information necessary for making informed investment choices. In this sense, the EU Commission, back in May 2023, proposed an omnibus directive aiming to ensure that the legal framework for retail investments sufficiently empowers consumers, encourages improved and fairer market outcomes and creates the necessary conditions to grow retail investor participation in capital markets. The Retail Investment Strategy (RIS) Proposal, aims to, inter alia:

• Modernize disclosure rules
  
• Develop benchmarks for evaluating financial products
• Address potential conflicts of interest
• Ensure financial advisors examine retail investors’ financial situations more carefully
• Require that marketing be fair, clear and not misleading
• Improve financial advisors’ and retail investors’ knowledge of financial markets
• Improve investor categorization
• Enhance supervisory cooperation between national competent authorities and the European supervisory agencies

On 24 May 2023, the EU Commission released the proposal of the Retail Investment Strategy and several amendments to the PRIIPs Regulation. Although this is the EU Commission’s final proposal, it may not be the final version of the text which needs to be agreed and voted on by both the EU Parliament and the Council before becoming law.

In the upcoming paragraphs, the formal steps pending the final approval of the RIS and the related timeline will be presented.

EU legislative process - level 1: Up to this stage, both the Parliament and the Council are still yet to agree internally on their positions, especially on controversial propositions from the Directive proposal, i.e., value for money, benchmarks and inducements.

Only after they have established their individual positions will trialogue discussions begin, to agree upon a final version of the text. Based on the current progress and on the challenges ahead, a final version of the level 1 legislation in 2024 is uncertain.

EU legislative process - level 2: Based on the final text of the Directive approved by the EU committees, the European Supervisory Authorities (ESAs), which include the European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA) will start drafting the Regulatory Technical Standards (RTSs) which will define the practical requirements which financial institutions must comply with. ESAs will take approximately 18 months before submitting the RTSs to the EU Commission, who can still make some amendments before adopting the RTSs through delegated acts. 

Based on the above-mentioned steps still to be performed, the RIS will likely not become applicable before the beginning of 2026.

The RIS will impact manufacturers1 and distributors of financial products in the following key areas:

What has changed since the publication of the proposal?

Since its publication in May 2023, the European Parliament has held several discussions on RIS. In October 2023, the rapporteur’s report was published, suggesting several amendments to the proposal. Key amendments are related to:

• Inducement ban
• Cost benchmarks
• (F)influencers
• Cost-efficiency

Will the full ban on inducements move forward?

The RIS Proposal provided for a ban on inducements paid from manufacturers to distributors in relation to the reception and transmission of orders (RTO) or the execution of orders to or on behalf of retail investors. It also required distributors to separately disclose and itemize all third-party payments ex-ante and to communicate their purpose and expected compounded impact on returns.

The rapporteur is against a full ban on inducements and argues that the introduction of a partial ban on execution-only services may not only not address the issues regarding conflict of interest but also be a first step towards a full ban. Therefore, in the report, the excerpt which requires Member States to ensure that entities which manufacture and/or distribute products do not pay or receive any fees or commissions, or provide or are provided with any non-monetary benefit with regard to the provision or distribution of such product, to or by any party except the customer or a person on behalf of the customer, was removed2 from the text.

The rapporteur also suggested to rephrase the requirement for investment firms, when providing portfolio management, to not accept and retain (instead of pay and receive) fees, commissions or any monetary or non-monetary benefits paid or provided by any third party or a person acting on behalf of a third party in relation to the provision of the service to clients.

In the rapporteur’s opinion, rather than introducing a ban on inducements, it is suggested it is necessary to enhance the current framework with appropriate tools and improvements which could, for example, increase transparency.

Is best value a synonym for cost efficiency?

The RIS Proposal required investment firms, insurance undertakings and intermediaries, in case of non-independent advice, to perform a client’s best interest test, replacing the MiFID quality enhancement and the IDD consumer detriment tests. Under this circumstance, distributors would have to ensure they:

• Base their advice on an assessment of an appropriate range of financial products
• Recommend the most cost-efficient financial product from the range of suitable financial products, and
• Offer at least one financial product without additional features which are not necessary to the achievement of the client’s investment objectives and that give rise to additional costs³

It is worth noting that this provision seemed to require financial advisors to recommend the cheapest suitable product (which may not necessarily be the product offering the best value for money). In the report, the rapporteur proposed to clarify the notion of cost efficiency by mentioning that it should be based on the investment firm’s assessment of the instrument’s net return expectations taking into account all implicit and explicit costs and charges. In addition, it was explained that the products that are offered to consumers must be tailored to their specific needs and objectives. Therefore, it is not only the price that matters, but equally the quality of the product and of the service. 

The report also gives a new mandate to ESMA to develop RTSs which must specify:

• The criteria for the assessment of an appropriate range of financial instruments, and how those criteria are to be fulfilled where investment advice is provided on a non-independent basis and only financial instruments manufactured within the group of the investment firm providing advice are assessed
• For different categories of financial instruments, how return expectations are determined, and whether and when past performances or simulated future performances are to be used where applicable

Value for money: will cost benchmarks remain in the text?

In the initial proposal, product governance rules and pricing processes were strengthened in order to improve value for money for investors. In this sense, product manufacturers and distributors would be required to identify and quantify all costs and charges and assess whether such costs and charges could undermine the value expected to be brought by the product. Pricing of PRIIPs, UCITS or AIFs would need to consider cost benchmarks4 relevant for the type of product and investment strategy. These cost benchmarks should be used both by manufactures and distributors for comparison purposes. In the case of deviation (from these benchmarks), firms would be allowed to establish the costs and charges only if they managed to prove the costs and charges were justified and proportionate.

The rapporteur affirmed that the lack of clarity regarding the methodology applied to design the benchmarks prevents the market from assessing how they would truly unfold in practice. In the report, the rapporteur agrees with the principle that the product must deliver value for money and that products with unjustified and disproportionately high costs and charges should have no place in the market, however they are of the view that further discussions are needed in order to find the right and balanced approach. Meanwhile, the rapporteur has deleted all provisions regarding cost benchmarks from the text.

Will (f)influencers be subject to RIS rules?

Digitalization has created a new generation of investors. In this context, we have experienced the emergence of the so-called (f)influencer, that is a person who, by virtue of their popular or cultural status, has the ability to influence the financial decision-making process of others through promotions or recommendations on social media (such as, posts/videos often stylized to be entertaining so that they will be shared with other potential buyers) and may be compensated by the business offering the product or service, the platform on which the message appears, or an undisclosed financier.⁵

The European Commission affirms that, since influencers often advertise or sell products on a regular basis, they are categorized as traders for legal purposes. 

The RIS Proposal provided for rules to ensure marketing communications are clear, fair and not misleading and to clarify the legal expectations towards (f)influencers. It explicitly stated that, in the case of unauthorized online advice or marketing, Member States would have the power, inter alia, to order to remove or to restrict access to an online interface, order to delete a fully qualified domain name and impose risk warnings. The rapporteur has welcomed these provisions and has suggested that, when using (f)influencers to carry out their marketing communication, firms should: 

• Establish a written agreement with the (f)influencers laying out the content of their contractual relationship
  
• Provide the competent authority with the identity and contact details of the (f)influencers whose services they rely on upon request, and 
• Regularly operate controls over the activities carried out by the (f)influencers to ensure their compliance with RIS

Other provisions

The rapporteur has added several provisions regarding financial data providers. First of all, data provider was defined as a legal person whose occupation includes the offering and distribution of financial and non-financial market data on a professional basis. To ensure that the provision of market data is fair, reasonable, non-discriminatory and transparent, as well as regarding the quality of the data, the rapporteur has also proposed that data providers must, inter alia:

• Disclose on their website the methodologies and data sources or estimates they use in the provision of their services
  
• Ensure that fees charged to users for the provision of financial and non-financial data are not discriminatory, consistent across providers and are based on actual costs
• Adopt measures to ensure that the information they use for financial and non-financial data is of sufficient quality and from reliable sources
• Adopt and implement sound administrative and accounting procedures, internal control mechanisms, annual external audit and effective control and safeguard arrangements for information processing systems
• Standardize and simplify terms of license agreements between data providers
• Prevent, identify, manage, and monitor conflicts of interest to maintain a fair, non-discriminatory and transparent provision of market data

The rapporteur has also argued that the European Union should implement a horizontal and holistic European regulation11 for both financial and non-financial data providers and their activities, which should be accompanied by increased supervision of all data providers at the European level.

How EY can help

At EY Luxembourg we have an established RIS team specifically dedicated to helping clients in the wealth & asset management, banking and capital markets, and insurance sectors, in Luxembourg and across Europe, get ready for the impending changes.

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