Adoption of the European Commissions retail investment strategy

On 24 May 2023, the European Commission (the 'Commission') adopted and published its retail investment strategy ('RIS') a key tenet of its Capital Markets Union Action Plan (the 'CMU Action Plan'). One of the core objectives of the CMU Action Plan is to develop retail investment and make the EU a more appealing location for individuals to save and invest long-term, allowing individual investors to benefit from adequate protection, bias-free advice, fair treatment and cost-efficient markets with transparent and understandable product information. Following an initial RIS industry consultation in 2021, the Commission subsequently launched a further industry consultation at the beginning of 2022 in order to review and improve the suitability and appropriateness of the current regime as well as increase consumer participation. 

The recently published RIS consists of two 'mutually reinforcing' legislative proposals:

• An Omnibus Directive amending a number of existing directives in the financial services sector, namely, the UCITS Directive (2009/65/EC), Alternative Investment Fund Managers Directive ('AIFMD'), the MiFID II Directive (2014/65/EU) ('MiFID II'), the Solvency II Directive (2009/138/EC), and the Insurance Distribution Directive ((EU) 2016/97) as regards the Union retail investor protection rules (COM(2023) 279 final); and

• A proposed Regulation amending Regulation (EU) 1286/2014 (the 'PRIIPs Regulation') as regards the modernisation of the key information document (KID) (COM(2023) 278 final).

It is envisaged that the RIS proposals will deepen the involvement of retail investors in capital markets, partly by using tougher protections to build up trust in investing and support the EU's long-term competitiveness. While the aims of the RIS are undoubtedly both ambitious and wide-ranging spanning multiple sectors and harmonising investor treatment across a number of investment products, in this briefing we will examine some notable proposals in the RIS package of legislative measures impacting on UCITS management companies and alternative investment fund managers ('FMCs') namely:

• that costs and charges must be justified under new quantitative cost benchmarks introduced as part of 'value for money' assessments, and so be aligned with the expected returns of the fund or share class; and
• enhancements to the PRIIPs key information document ('KID') to make it more suited to the evolving needs of investors and to increase legal clarity.

Value for Money in Fund Costs

Following the Central Bank's own findings and expectations arising from its review of the costs and fees charged to UCITS as part of European Securities and Markets Authority's ('ESMA') Common Supervisory Action on costs and fees (the 'CSA') and secondly ESMA's Opinion earlier in May seeking clarifications to the legislative provisions relating to undue costs, the details of the Commission's value for money proposals have been keenly awaited by the funds industry.

Under the proposals contained in the Omnibus Directive, FMCs will need to meet new standards applicable to UCITS and also to AIFs that are marketed to retail investors, demonstrating that they deliver value for money for those investors. The pricing processes maintained by FMCs will be strengthened by the introduction on a legislative basis in both the UCITS Directive and AIFMD of value for money obligations. The rules will clarify by way of regulatory technical standards ('RTS') those costs deemed eligible costs and ensure that the relevant conditions are met in the pricing process. ESMA had recommended that the Commission should clarify the eligibility of fund costs in light of the list of costs and expenses contained in the existing PRIIPs Regulation RTS.

ESMA is mandated to develop, make publicly available, and regularly refine cost and performance benchmarks for UCITS and AIFs (which market to retail investors) which present similar levels of performance, risk, strategy, objectives, or other common characteristics. To facilitate the development of these benchmarks, it is proposed that an obligation be imposed on FMCs to report the costs borne by investors and the performance of the relevant investment product to national competent authorities, who would in turn provide the data to ESMA.

FMCs will be required to conduct a pricing process assessment annually to include a comparison with the relevant benchmark on costs and performance published by ESMA. In the event of deviation and where justification and proportionality of costs and charges cannot be demonstrated, or if the UCITS/AIF or its share classes do not comply with other criteria set out by the FMC in the pricing process, that UCITS/AIF or its share class would be prevented from being marketed to retail investors by the FMC. Additionally if in the course of the assessment the FMC determines that undue costs have been charged, including where costs have been miscalculated to the detriment of investors, compensation will be required to be paid to affected investors.

Targeted Changes to the PRIIPs KID

Following recommendations made by the European Supervisory Authorities for significant changes to make the KID more consumer friendly and a broad review of the PRIIPs framework, the RIS includes a number of concrete proposals to improve and standardise the information provided to retail investors under the PRIIPs Regulation. These include:

• the introduction of a summary dashboard, to make key information on the costs and risks of investment products highly visible at the top of the document;
• more flexibility to display information from KIDs in a digital and user-friendly way, notably by allowing the use of layering, i.e. the possibility to click on the titles of different sections of the KID and expand the text of the sections of interest, which complements the fixed document, such as in PDF format, that is used currently. The package also specifies conditions for more interactive features;
• a new sustainability section in the KID to make information on sustainability-related characteristics of investment products more visible, comparable and understandable for retail investors. This section will build entirely on existing sustainability disclosures, avoiding any new reporting burdens; and
• clarifications to provide greater legal clarity on the exclusion of specific products (e.g. corporate bonds) that were not originally intended to be captured by the PRIIPs Regulation.

Other aspects of the RIS including product governance assessment and suitability rules and the tightening of the conditions under which 'inducements' are permitted under MiFID II have attracted significant focus in the debate and these proposals are not covered by this briefing.

Related resource materials, including the Commissioner's announcement, FAQs, a factsheet and an impact assessment report are available on the Commission's RIS webpage.

Next Steps

The next step is for the European Parliament and the Council of the EU to scrutinise the legislative proposals in the time remaining in the mandate of the current Commission. The proposed Omnibus Directive states that member states will have twelve months to transpose it from the entry into force date and shall apply the Directive's provisions from the date 18 months after the entry into force date.

The proposed Regulation states that it should apply from the date 18 months after the entry into force date in order to provide sufficient time for RTS under the new legislation to be developed.

It is noted that FMCs managing both UCITS and AIFs are expected to take steps by the end of Q3 2023 to conduct a gap analysis against the Central Bank’s expectations in its recent industry letter on costs and fees. Accordingly, FMCs will be keeping a watchful eye on the progress of these Commission proposals and Walkers will keep clients briefed on developments throughout the negotiations.