The European Union Commission has officially adopted a retail investment strategy that aims to safeguard consumers’ interests. In the heart of the commission’s “2020 Capital Markets Union Action Plan” lies investment growth. The strategy was adopted as a method to achieve this goal. It is also a plan adopted to boost the EU Capital’s Market to a level that could potentially mirror other large and strong capital markets. A larger capital market results in more capital flow through the Union and thus a stronger economy.
The series of regulatory measures include the following:
1. A disclosure framework aiming to uphold transparency:
- Investment firms, and insurance undertakings that distribute investment products must attach mandatory risk labels to products with materials considered risky by the ESMA and EIOPA committees.
- The firms must notify investors regarding the cost, changes and third-party payments related to their investment. The information on third party payments must be delivered in a comprehensible way. The firms also carry the obligation to provide investors with annual statements that will include information on cost changes and third-party payments.
2. Marketing Communications Regulations:
- Creating a five-steps-test the commission requires firms to clearly identify marketing communications that are appropriately attributed to the investment firm, contain the essential characteristics of the investment product, and are fair clear and not misleading.
- Effective organization and administrative arrangements must be adopted by the firms in order to comply with marketing communications obligations.
3. The ban on inducements regarding independent investment advice and portfolio management is extended to a ban on inducements paid by manufacturers to distributors in relation to execution-only sales.
4.The financial advisor of the investment must:
- Assess a range of financial instruments in their advice;
- Select the cost-efficient choice;
- Provide the option of at least one financial product without additional features and costs.
5. Aiming to achieve the reduction of incompatible offers:
- A pricing process allowing for the identification of all costs will be imposed on the firms.
- A relevant benchmark for the approval of products that can only be deviated from if proven that the costs are proportionate will be adopted.
- A quantification of distribution costs and a price assessment will be carried out.
- Firms must explain thoroughly the offer made and the appropriate steps to be taken in order for investors to take informed decisions.
- The suitability assessment for simple and cost-efficient products will not require assessing the client’s knowledge and experience but an assessment of the client’s ability to bear the risks of the investment.
- Clients will be considered professional in an investment of at least 250 000EUR.
Apart from the regulatory framework a compliance certificate can be acquired by firms. The Commission’s goal is to increase consumer investors’ trust in investing by promising them a high level of protection while investing. By applying measures to create a safe investing environment, the commission aims to encourage investment.
At Christys we remain committed to providing educated advice that considers all regulatory changes including the current retail plan adopted by the commission. Our Investment Funds practice covers a wide range of alternative investment fund structures with particular focus on private equity, real estate, infrastructure debt and hedge funds. We advise on all aspects of fund formation, including advice to determine the most appropriate structure that will best fit the investment strategy, investor base and requirements of the management team. We are equipped to advise an investor on how to benefit from the scheme and a firm on how to comply with the newly established changes.
