Brussels sprouts its reforms

Retail banking reform in Brussels focuses on investor protection and improved disclosure, reports Dr DAVID P. DOYLE, an EU expert on financial services legislation.

Since the financial crisis, one of the areas that has escaped EC legislative review and regulators’ attention has been the retail investment sector. Much effort has, understandably, been devoted to capital requirements, derivatives trading, hedge funds and private equity, credit rating agencies and strengthening the prudential supervisory structure at pan-EU level.

Now that the dust is settling, the EC is devoting more time to the subject of packaged retail investment products (PRIPs), meaning the adequacy of the rules governing a range of retail investment products that are marketed directly to consumers. These fall broadly into four groups: investment funds, insurance-based investment products, retail structured securities, and term deposits.

Last spring, an EC Communication on Retail Investment Products* made the case for wider protection of investor and financial consumers. It seeks two things:

• greater clarification and harmonization over the form and content of key investor disclosures and associated marketing materials provided to investors before they make an investment decision.

• strengthened selling rules embracing the conduct of business of product distributors and intermediaries and the avoidance, management and disclosure of conflicts of interest in the sales and advice process.

Essentially, the Commission is seeking to replace the existing sectoral patchwork across the EU with a distinctly horizontal approach to both mandatory disclosures and selling practices.

A proposal on PRIPs is expected from the new EC Internal Market Commissioner, Michel Barnier, possibly this summer for public consultation, and a fully-fledged proposal for a directive for review and approval by the European Parliament by the year end.

In early consultations between the EU regulators and the banking and insurance industry, discussion focused on scope, sales practices and product disclosures. The Commission, backed by the EU finance ministers as far back as 2007, began a review of the “consistency of EU legislation” in retail investments.

The findings, which will heavily influence draft legislation going forward, showed that a substantial body of legislation already exists to protect investors at various levels of depth and comprehensiveness in individual Member States – and across-borders. Major differences, however, emerged as to the legal requirements on product transparency, sales and advice according to the legal form of the product and the distribution channel.

The Commission’s vision is to:
• strive for “coherence” in EU investor protection on disclosures and selling techniques, as critical in addressing the “regulatory patchwork” and filling in the gaps.

• avoid regulatory arbitrage on a crosscountry basis for the same products, whilst accommodating financial innovation.

• target mid-to-long term capital accumulation products that offer exposure to financial assets in a packaged form – that’s to say, investment funds, investments packaged as life assurance, retail structures securities and structures term deposits;

Following consultations with the EC and the Committee of EU Banking Supervisors (CEBS), we appear to be moving towards a framework for PRIPS based on:

• creating greater consistency on rules governing conduct of business, inducements and conflicts of interest. For instance, the EC points to the potential danger of sales commission structures influencing the product sales to investors.

• using the Markets in Financial Instruments Directive (MiFID) as a benchmark to govern sales practices. These may have to be modified to take account of the different types, complexity and risk of term products. A comprehensive review of MiFID is underway by the EC.

• adapting the Undertakings for Collective Investment in Transferable Securities (UCITs) investor-friendly product information format as a benchmark, based on Key Investor Information (KII) model.

Clearly, policies will have to be devised on structured long-termproducts, as raised by the Committee of EU Banking Supervisors (CEBS) – for instance: Are capital-guaranteed products considered as “deposits” in all EU States? How is capital guaranteed and what procedures need to be put in place to gain access to initial capital?

EC Internal Market DG has committed itself to dialogue, analysis, and consultation on PRIPs between now and year end, facilitated by input from the Pan-EU insurance and securities regulatory committees: the Colleges of European Insurance & Occupational Pensions Supervisors (CEIOPS), the EU Securities Regulators (CESR) and, of course, CEBS.

The next few months will be crucial in finalising definitions on the scope, and strengthening rules on sales practices and product disclosures associated with future PRIPS legislation at EU level.

And let’s not forget the ongoing reviews and updating of associated EU legislative measures, such as MiFID, the Market Abuse Directive, UCITS IV, the Insurance Mediation Directive, the Prospectus Directive, Investor Compensation and Deposit and Insurance Guarantee schemes. The outcome should result in an aligned, horizontal legislative package, consolidating rules across the banking and insurance sectors and across distribution channels and products.

*European Commission Communication on Packaged Retail Investment Products: COM(2009) 204 final, 30 April 2009, and Frequently Asked Questions

(Memo/09/210), 29 April 2009 http://ec.europa.eu/internal_market/finservices-retail/investment_products_en.htm

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