European Commission’s new ambitions for retail investment services

EU Commission draft proposals to review MiFID II, IDD and PRIIPs

Context

With MiFID II entered into force in 2018, a page turned and closed for a moment the MiFID book. However the story was bound to continue as the regulatory community further discussed concepts including value for money, transparency, cost and undue costs. New topics emerged, thanks to digitalization and sustainability. Hence, in 2020, these topics culminated in a large consultation with new ideas for the MiFID and Insurance Distribution Directive (IDD) framework.

All these materialized on 24 May 2023, when the European Commission released a proposal for a Directive of the European Parliament and of the Council amending Directives (EU) 2009/65/EC, 2009/138/EC, 2011/61/EU, 2014/65/EU and 2016/97/EU of the European Parliament and of the Council as regards strengthening EU retail investor protection rules.

The draft aims to amend aspects of MiFID, most notably adding provisions for product governance, benchmarking exercises for PRIIPs, additional disclosures on the KID and an inducements ban on execution only services, which will apply on top of the current ban for independent advice and discretionary portfolio management.

About the proposal

If the EU Commission maintains its course toward a transversal approach to the distribution of financial products and services, it will be via both MiFID firms, PRIIPs manufacturer and insurance companies, through similar amendments to IDD and PRIIPs.

We can expect an evolution around product governance, amendments to definitions, and added emphasis on digitalization and communication with clients. Continue reading for the most relevant changes.

Practically, the proposal aims to align both insurance and financial products distributions as followings:

• Improve the provision of information to retail investors about investment products and services to take into consideration digital communication and increase standardization;
• Enhance transparency through improved comparability of costs building on the idea of bringing value for money to retail investors;
• Offer a yearly full review of the investment portfolio performance;
• Ban inducements for so called "execution-only” sales (on top of current bans for portfolio management and independent advice);
• Improve retail investors’ marketing communication by expanding current rules to include digital and direct or indirect (through influencers, for example) communication;
• Introduce more flexibility for eligibility for professional investor status with critical proposals for private banking and wealth management;
• Introduce a form of proposal benchmarking based around the cost/benefit of products;
• And invite member states to improve broad-based financial literacy.
   

Specific points of attention

The following views are based on the current version of the text and should therefore not be interpreted as final.
 

Product proposal and cost benchmarking

Article 16a introduces a new process for approving any financial instrument before its release into the market, including a pricing process subject to comparison with the relevant European Securities and Markets Authority (ESMA) benchmarks. Investment firms are prohibited from approving financial instruments which deviate from said benchmarks, unless additional tests establish the proportionality of the pricing.

Packaged retail and insurance-based investment products (PRIIPs) are included in this financial instrument definition. Investment firms that offer PRIIPs are obligated to identify the costs of distribution and assess their proportionality. They may not accept or offer monetary or non-monetary benefits for the design and provision of financial instruments including PRIIPs. ESMA and European Insurance and Occupational Pensions Authority (EIOPA) will develop common benchmarks to aid the cost assessments of PRIIPs in both the manufacturing and distribution stages.

Article 16b details exemptions from the process for investment services relating to bonds ”with no other embedded derivative than a make-whole clause or where the financial instruments are marketed or distributed exclusively to eligible counterparties.”
 

PRIIPs Key Information Document upgrades

The Directive introduces amendments the PRIIPs Regulation to cover:

1. A new section “How environmentally sustainable is this product?” providing information on sustainability aspects
2. A new section “Product at a glance” summarizing type of the product, risk indicator, total cost, RHP and existence of insurance benefits set out in the PRIIPs Regulation
3. The removal of the comprehension alert from the KID
4. Updates of the rules to present cost for MOPs
5. New rules on scope of application to some products, including some categories of bonds
    

Ban on inducements

Notably, with the introduction of the new Article 24a, the Directive introduces a ban on inducements paid from manufacturers to distributors in relation to the reception and transmission of orders, or the execution of orders to/on behalf of retail clients. In other words, the ban targets execution-only sales. This wording can be widely interpreted and applied, which may cause confusion in the future. Although it will be further subject to a review clause after three years, we can say that, at this stage, there is no sign of a full ban on inducements despite some MEPs being in favor of it.

The Commission with the European Parliament and Council must still consider several factors before the launch date (tentatively in 2027 or 2028). This document is still a draft text that will have to be debated by EU institutions (Parliament, Council, or Member States). After the final version is published, there will be further practical details shared through level 2 and 3 texts such as delegated regulations and guidelines Moreover, Member States will likely have an implementation period of two to three years, based on previous MIFID experience.

What is the impact for your organization?

First and foremost, business distribution of financial products, IT developments and access and provision of financial services/solution to clients will be impacted. These rules are a true gamechanger for the industry both in banking/financial and insurance (life/pension) that will create clear challenges ahead. We can anticipate that impacts will be felt at the distribution level among products managers as well as AIFMs, ManCos and other asset managers.
 

Next steps

The current text will likely be subject to considerable expansion. Even with the time allowed for implementation, the project will have a tremendous impact on business models and organization of financial groups. Thus, it is never too early to start discussing potential pitfalls, opportunities and challenges in your organization and distribution. Furthermore, it might be wise to offer products and services aiding with this adaptation and in consideration of the following timeline: 
 

How can Deloitte help you?

Deloitte’s subject matter experts can help you design and implement your business strategy in light of the evolution of regulatory frameworks and market trends.

Key Deloitte services include:

• Assessment and definition of business strategy
• Assessment and guidance with updating compliance control framework and policies
• Impact assessment and gap analysis of the to be state versus the current state of your organisation

Deloitte’s Regulatory Watch service helps you stay ahead of the regulatory curve to better manage and plan upcoming regulations.