Retail investment package: Council agrees on its position

The 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
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.