Earlier this month, the European Commission published three pieces of legislation aimed at enhancing the protection of retail investors: the Packaged Retail Investment Products (PRIPs) regulation, the revised Insurance Mediation Directive (IMD), and the Undertakings for Collective Investments in Transferable Securities V (UCITS) Directive. In a joint press release, CFA Institute and four other leading European associations welcomed the focus of EU legislators on the protection of retail investors. These four associations are EuroFinuse (European Federation of Financial Services Users), FECIF (Fédération Européenne des Conseils et Intermédiaires Financiers), EFAMA (European Fund and Asset Management Association), and AILO (Association of international Life Offices). This strong coalition of industry voices was echoed in the English as well as in the French media.
The three new pieces of legislation are essential to addressing crucial issues of investor protection and, together with the Markets in Financial Instruments Directive (MiFID), the lack of a level playing field in the distribution of retail financial products across the European Union.
The long-overdue PRIPs regulation is of particular importance. In simplest terms, a PRIP is an investment product sold to a retail customer. The proposed draft essentially covers retail investment funds, life insurance products, and retail structured products such as structured notes and structured deposits. It does not cover securities which do not embed a derivative (such as plain shares and bonds), deposits with a rate of return that is determined in relation to an interest rate, and occupational pension products.
The objective of the PRIPs regulation is to provide the investor with key information about the investment product he/she considers buying, in a format that is simple, easy to understand for an average investor, and standardized. This standardisation is essential as it will enable the retail investor to compare the essential characteristics of various investment products, and therefore make a duly informed investment decision. Thus, providers of PRIPs will have to develop a “Key Information Document” (KID) that details the essential characteristics of the investment product, allowing the individual investor to compare the strategy, expected return, risks, and costs of different savings products.
It is important to note that this new legislation is a European regulation, not a directive. It therefore applies directly to all products falling under the regulation, without a transposition into national law, which would risk resulting in different interpretation and implementation from one country to another. This is good news as it will avoid regulatory arbitrage.
For CFA Institute, EuroFinuse, FECIF, AILO, and EFAMA, the following points are of particular importance:
- The proposed PRIPs regulation will now be discussed in the European Parliament and the Council. It is of utmost importance that its scope remains as wide as possible, or otherwise it would miss its intent: enable retail investors to compare savings products with similar objectives, before choosing the one that best fits their needs.
- Once the European Parliament and the Council reach an agreement and the regulation is adopted, the main challenge will be to define more precisely what should be presented in the KID, under which format, and how the figures or indicators enabling the comparison of one product to another will be calculated. In fact, the investment products falling under PRIPs have very different structures. Therefore the exact content of the KID will be subject to tough negotiations between European regulators and the various sectors of the financial industry affected by the regulations (banks, insurance companies, fund managers). This is why CFA Institute, with the active support of EuroFinuse and FECIF, is leading a research project on the standardised presentation of costs in a Key Information Document (KID) for PRIPs, to be published in the autumn.
While there is much more to be done to efficiently protect retail investors, this first draft of the PRIPs regulation is a step in the right direction.