EU enhances investor protection rules, amending MIFID, UCITS and AIFMD Directives

On 24 May 2023, the EU Commission adopted a "Retail Investment Strategy" package, consisting of a proposal for a Directive and a proposal for a Regulation, which sets out a new regime according to which protection rules related to investment carried out by retail investors have to be enhanced.

Highlights include:

Investor protection

With respect to retail investor protection, new rules contained in the proposed package

• aim to simplify and reduce the information presented to retail investors, by requiring them to: (i) display appropriate risk warnings in all information materials concerning particularly risky products, in order to alert retail investors to specific risks of potential financial losses; (ii) provide all retail clients and customers with an annual statement including, among other things, information on costs and charges, including third party payments, and performance – which will now be standardised – and the minimum information requirements to be included in the annual statement.
• introduce new duties regarding the risk of unbalanced or misleading marketing communications emphasising benefits only. In particular, intermediaries must (i) adopt a policy on marketing communications and practices; (ii) have effective organisational and administrative arrangements in place to ensure compliance with all obligations related to marketing communications; (iii) clearly identify marketing communications – including essential characteristics of the investment product or service in a fair manner, balancing the relevant risks and benefits – and ensure they are appropriately attributed to the investment firm, insurance undertaking or insurance intermediary by which or on whose behalf they are made.
• introduce a new ban on inducements paid from manufacturers to distributors in relation to the receipt and transmission of orders, or the execution of orders to or on behalf of retail clients – keeping all previous bans on inducements regarding independent advice and portfolio management. In order to act in the best interests of their clients and customers, financial advisors have to, as a minimum (i) base their advice on an assessment of an appropriate range of financial products, (ii) recommend the most cost-efficient financial product from the range of suitable financial products, and (iii) 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 costs, so that retail investors are also presented with alternative and possibly cheaper options to consider.
• introduce new requirements for manufacturers to set out a pricing process allowing for the identification and quantification of all costs and charges, and an assessment of whether such costs and charges undermine the value which is expected to be brought by the product.
• seek to ensure that Member States promote financial education measures at national level.
• enable supervisory authorities (i) to use supervisory tools and quickly take action against misleading marketing practices; (ii) to restrict access to websites that pose a threat to investor protection; and (iii) to carry out mystery shopping activities. 

Investor onboarding process

The proposed Directive aims to ease restrictions for investors to qualify as professional. In order to do so the proposal (i) reduces the wealth criterion from Euro 500,000 to Euro 250,000 and (ii) inserts a possible fourth criterion, which requires that the client can provide the firm with proof of having undertaken recognised education or training that evidences their understanding of the relevant transactions or services envisaged, and their ability to evaluate adequately the risks.

The proposal also aims at implementing suitability and appropriateness tests which are better adapted to the needs of retail investors. In order to do so, the proposal introduces an obligation for investment firms to explain the purpose of the assessments to clients and customers in a clear and simple way, and to obtain all relevant information from clients and customers which may be necessary and proportionate for the assessments.

Professional standards for investment advisors

The proposed Directive introduces requirements – deriving from ESMA guidelines – for investment advisors, provided for in the new Annex V, which include, among others the need: (i) to understand the key characteristics, risks and features of the financial instruments being offered or recommended, including any general tax implications to be incurred by the client in the context of transactions; (ii) to understand the total costs and charges to be incurred by the client in the context of the type of investment product being offered or recommended and the costs related to the provision of the advice and any other related services being provided; and (iii) to understand how the type of investment product provided by the firm may not be suitable for the client, having assessed the relevant information provided by the client against changes that have occurred since the relevant information was gathered. 

Modernisation of the key information document

The main novelties contained in the proposed Regulation are: (i) the introduction of a new section in the PRIIPs KID entitled ‘Product at a glance’ to summarise and highlight the information on an investment product type, its costs and the level of risk, recommended holding period and presence of insurance benefit; (ii) the amendment of the rules for presenting costs of multi-option products (‘MOPs’), specifying the conditions that have to be met in order to provide transparent information to retail investors and facilitate choice between different investment options; and (iii) the introduction of a new dedicated section in the PRIIPs key investment document focused on sustainability that complements the sustainable finance disclosure framework.