EUROPEAN COMMISSION

Brussels, 24.5.2023

SWD(2023) 278 final

COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT REPORT

Accompanying the document

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 (EU) 2016/97 as regards the Union retail investor protection rules

























and

























Regulation of the European Parliament and of the Council amending Regulation (EU) No 1286/2014 as regards the modernisation of the key information document

{COM(2023) 278-279 final}
{SEC(2023) 330 final}

Contents

1.Introduction: Political and legal context

2.Problem definition

3.Why should the EU act?

4.Objectives: What is to be achieved?

5.Description of the policy options

6.What are the impacts of the policy options and how do they compare?

7.Preferred Combination of options

8.How will actual impacts be monitored and evaluated?

Annex 1: Procedural information

Annex 2: Stakeholder consultation (Synopsis report)

Annex 3: Who is affected and how?

Annex 4: Disclosures and marketing communications

Annex 5: Financial literacy

Annex 6: Investor categorisation

Annex 7: Inducements

Annex 8: Enhanced suitability and appropriateness assessments

Annex 9: Supervisory enforcement

Annex 10: Professional qualification of financial advisors

Annex 11: Evaluation of the retail investor protection framework

Annex 12: SME TEST

Annex 13: Glossary

Annex 14: Value for Money - benefits and Costs

1.Introduction: Political and legal context

1.1 General context

This impact assessment concerns the package of measures that will constitute the Retail investment strategy, which is an initiative originating from the 2020 CMU Action Plan. The strategy seeks to place the retail investor centre stage, ensuring the development of a regulatory framework that empowers consumers to take informed financial decisions and adequately protects them in the single market. The assessed package of measures concerns improvements to the retail investor protection framework. Strong safeguards for retail investors are a pre-requisite for a well-functioning, transparent market that establishes the necessary conditions for trust and confidence.

With respect to the general economic context against which the measures in the strategy are considered, the EU market for retail investments remains, by international standards, characterised by low levels of retail investor participation. In 2021, approximately 17% of EU27 household assets were held in financial securities (listed shares, bonds, mutual funds and financial derivatives), amounting to EUR 5 610 billion, corresponding to 38.6% of GDP). In comparison, households in the US held around 43% of their assets in securities 1 . The retail investor base in the EU amounts to an estimated 50 million households, i.e. about a quarter of all EU-27 households 2 . According to a recent Eurobarometer survey 3 , around half of the respondents did not consider that they had sufficient means to invest, while around another quarter gave other reasons for not investing (see below). Households in the EU-27 receive around EUR 450 billion per annum in income from their financial wealth 4 , while paying between an estimated EUR 100 and 300 billion per annum to financial service providers. 5 This range represents the revenues of financial service providers from retail business.

A large share of households’ financial wealth is held as bank deposits at negligible nominal yields, even though assets invested in stock markets have made substantial gains in recent years. That suggests that a large proportion of consumers may have missed out on the opportunity to benefit from capital market investment returns.

Retail participation varies widely across Member States, reflecting different historical, economic and social conditions. It is even more heterogeneous within Member States: participation rates increase with the education level, degree of financial literacy and income. Older segments of the population hold larger savings, whereas younger generations tend to be less risk averse when it comes to investing.

Investment experiences across EU Member States, % of survey respondents holding specific financial products

Source: Eurobarometer 509, ‘Retail financial services and products’ 2022

The reasons that retail investors are not investing may be manifold. In many cases, they may not be able to save and invest due to a lack of financial means. Other reasons may reflect more risk averse cultural preferences. In October 2022, the European Commission published the results of a Eurobarometer survey looking at retail financial services and products 6 , which indicated that 26% of respondents have, or have had, an investment product, although around half of respondents considered that they did not have the means to invest. Other reasons for not investing reflect concerns about the risks, uncertainty about the potential returns, lack of understanding/complexity, preference to put money elsewhere and lack of trust in advisors (see Eurobarometer chart).

Reasons why people do not invest

Source: Eurobarometer 509, ‘Retail financial services and products’ 2022

The Eurobarometer survey indeed reflects a number of problems for retail investors. Retail investors perceive investment products to be generally complex. Yet, although financial literacy levels vary considerably across Member States, too many consumers have poor understanding of the investment environment. The OECD/INFE 2020 International Survey of Adult Financial Literacy has shown that on average, consumers could only reply to around 60% of questions on basic knowledge concepts and financially prudent behaviours and attitudes. Only 26% of all adults responded correctly to questions on both simple and compound interest – which are crucial concepts for investment 7 . Evidence also suggests that a significant proportion of consumers is dependent on advice 8 : that is likely to be especially the case for retail investing.

Trust levels in investment services are also very low. Consumers regularly rank investment services among the worst performing services, including on comparability and trust 9 . Lack of trust in financial advice was also mentioned in the Eurobarometer as one reason for not investing.

Finally, if they do invest, retail investors may not always get the best deal: products and services offered to retail investors often carry high fees and commissions which have a negative impact on their return on investments. For example, in 2021, retail clients were charged on average around 40% more than institutional investors across asset classes 10 . Retail investors are heavily dependent on advised services, and retail investment products 11 in the EU are largely distributed through a commissions-based model where distributors receive fees and commissions from product manufacturers for the products they recommend and sell to retail investors. The existing rules do not sufficiently mitigate the conflicts of interest which are inherent in this distribution model, and which lead to the distribution of more expensive products and deliver suboptimal outcomes for retail investors.

The risk of suboptimal outcomes for retail investors is exacerbated by the current economic climate and the significant shift from a low interest rate environment towards high inflation and rising interest rates. The increasing cost of living and erosion of savings means that it is even more important that returns on retail investments are not eroded by high fees and that the legal framework is effective in facilitating an efficient market that offers better investment outcomes. Against the backdrop of an ageing EU population and longer life expectancy, long-term investments in capital markets could help people achieve higher sustainable returns and a complementary income for their retirement, while at the same time providing long-term orientated capital to the economy.

Furthermore, retail investments are affected by new trends. As is true in many other areas, digitalisation has a profound impact on retail investments. Digitalisation offers, for example, easy access to a wide range of services, products at lower cost, low-cost automated sales (sometimes with additional investment support), robo-advice and digital information ensuring transparency and facilitating the comparability of products. That is also the case, for instance, for tools to enhance financial literacy. Many retail investors, especially from younger generations, are increasingly turning to online investment opportunities. However, digitalisation may also create risks, such as facilitating investment fraud or misleading marketing practices from influencers using social media and other online channels. The existing rules on investment services were conceived for the more traditional (face-to-face) distribution channels. They may need to be adapted to better target the needs of retail investors and to accompany them in their investment journey.

There is also an increasing focus on sustainable investing by retail investors, who want their investments to also contribute to tackling the climate and biodiversity crises. This needs to be duly reflected in the legal framework, in particular with respect to disclosures and the professional certification of advisors.

It is also important to stress that there are limits to what legislative changes to the retail investor protection framework can seek to achieve. For example, different rules across Member States in the area of taxation (e.g. with respect to withholding tax) add to the challenges retail investors face when considering purchasing products outside their home Member State. Although these are significant issues, taxation affecting retail investing is outside the scope of this strategy and thus not addressed in this impact assessment 12 . Another important issue that is not addressed in this strategy relates to consumer redress, in case retail investors enter into a dispute with their provider. The issue of improving redress procedures will be subject to a separate initiative planned for 2023 13 .

While strengthening protections might increase the overall level of trust and confidence for retail investors, these changes alone may not lead to more people investing. However, by creating the conditions for a healthy investment environment that ensures a high-level of trust and integrity as well as better investment outcomes, it is likely that they would indirectly increase the currently observed low participation rates.

1.2 Political context

In line with the Commission’s stated objective of “an economy that works for people”, and as announced in the 2023 work programme 14 , the Commission is seeking to ensure that the legal framework for retail investments sufficiently empowers consumers, helps them ensure improved and fairer market outcomes and ultimately creates the necessary conditions to grow retail investor participation in the capital markets.

In its September 2020 New Capital Markets Union Action Plan , the European Commission announced its intention to come forward with a strategy for retail investments in Europe that seeks to ensure that retail investors can take full advantage of capital markets and that rules are coherent across legal instruments.

1.3 Legal context

The EU already has in place a legislative framework at EU level governing retail investor protection, which has been developed over several decades. The level of consumer protection has significantly strengthened over the years, in particular following the 2008 financial crisis.

The current legislative framework covers, with varying levels of harmonization, most aspects of the retail investor’s journey, ranging from the marketing of financial products and pre-contractual disclosure of information to financial advice. It consists of different EU-level legal instruments that aim to harmonise EU rules and create an integrated financial market on a sector-by-sector basis under which investors are effectively protected, efficiency is promoted, and the integrity of the overall market is safeguarded. The rules are spread across a number of different EU legal instruments described in the following table. They provide a legal framework which is developed in more detail at levels 2 and 3 and which together form the basis of the acquis on retail investor protection.

However, while this approach ensures that investor protection rules are adapted to the specific needs of the relevant sector, it also results in a patchwork of rules viewed from the perspective of a retail investor.

To address the problems on the retail investments market, further efforts are required at EU level to modernise and update the investor protection rules and establish coherent and consistent regulatory requirements across the Union.

This impact assessment also considers the interplay with other ongoing initiatives in the area of financial services. For example, the Open finance framework will aim to facilitate the access and re-use of customer data, with consent, across a range of financial services and enable data sharing and third party access for a wide range of financial sectors and products, in line with data protection and consumer protection rules. The Open finance initiative runs in parallel with the Retail investment strategy and coordination of the two will take place especially with regards to standardisation and/or portability of customer data.

2.Problem definition

2.1 What is/are the problems?

Financial markets are complex, which makes it difficult for many retail investors to understand the investment products and services on offer, including their costs, risks, and benefits. This complexity has different impacts on the behaviour of retail investors: some refrain from investing and keep their money in bank deposits, whereas others may seek to attain higher levels of knowledge before they feel able to make informed choices. The search for information and learning entails costs, which deter investment. Since retail investors will wish to avoid frustrating investment experiences and the risk of taking wrong decisions, their investment decisions are preceded by their assessment of trust in their own decision-making capacity and the quality of information and advice available to them. Information and financial advice have the character of ‘credence goods’ since complex information hinders investors’ ability to judge their quality or that of related financial advice 22 . Complexity makes retail investors vulnerable to cognitive biases and the use of non-rational factors that may not best suit their needs. They struggle to understand critical aspects, such as how financial incentives paid by product manufacturers to distributors can bias the advice that they receive.

The relationship between financial service providers and retail investors is characterised by a fundamental information asymmetry, which intensifies such consequences. Apart from providing technical services in the administration of households’ financial wealth holdings, financial intermediaries’ main added value is in helping investors overcome the information gap. Financial intermediaries’ revenues can be understood as the remuneration retail investors pay to receive information and advice. 23 However, investors’ search costs imply market power for financial service providers in the form of their ability to charge higher prices than if they were operating in a competitive environment. 24 While some investors follow the recommendations of advisors blindly, others refrain from asking for advice. 25 The broad-ranging EU regulatory framework focuses on protecting retail investors and aims to address the risks that stem from information asymmetry. It covers disclosure requirements, product oversight and governance rules as well as rules addressing conflicts of interest and governing the “point of sale” of investment products and services. Setting standards on the information given to retail investors reduces their learning costs, while regulating the services of financial intermediaries contributes to enhancing retail investors’ trust.

Despite the existence of those safeguards, the evidence (the evaluation of the framework in Annex 11, the results of the public consultation, the retail investment study and advice from the ESAs) points to a failure of the legislation to reach its intended outcome. As a result, retail investors are often not purchasing products that are in their best interest.

There are two key problems that persist in the area of retail investor protection:

1.Retail investors lack salient, comparable and easily understandable investment product information, while being inappropriately influenced by marketing communications.

Salient, comparable and easily understandable information about investment products is important to help retail investors make well-informed decisions. That purpose is however is hindered by several factors that limit the ability of investors to use and understand the information they need – some related to deficiencies in the retail disclosure framework, others related to insufficient levels of financial literacy. As evidenced in the Evaluation (Annex 11), while the retail disclosures framework has increased investor protection, the information documents provided to retail investors are rarely engaging and their layout is frequently very dense and not reader friendly. Insufficient levels of financial literacy make it harder for investors to find and assess available information and reflect it in their investment decisions. While financial service providers are legally required to provide different types of information to retail investors on financial products or services, the rules do not appear to be fully achieving their intended objective of increasing understandability and improving investment decisions. It is not possible to quantify the size of this problem, but evidence points to such deficiencies as being one of the pieces of the puzzle that together affect retail investors’ trust and willingness to invest.

The behavioural testing and mystery shopping exercise in the Retail investment study showed that the current disclosure rules are not sufficiently helping consumers overcome the underlying complexity of retail investment products. As a consequence, there is further potential for disclosures to better help retail investors make their decisions. Furthermore, a recent IOSCO study demonstrated that retail investors are increasingly exposed to the influence of social media and online marketing 26 . The current framework has not been sufficiently adapted to the increasing use of digital channels for retail investing. In addition, the current framework does not reflect the growing need of inclusion of sustainability preferences of retail investors.

2.Shortcomings in the investment product manufacturing and distribution process related to the payment of inducements and the extent to which product design reflects cost-efficiency and value for the retail investor.

Evidence suggests that some products offered and recommended to retail investors do not deliver satisfactory investment results and do not best serve their interests, nor correspond to their investment objectives, needs and preferences. Both EIOPA 27 and ESMA 28 have found that certain products offered to retail investors (e.g. certain structured investment products or insurance-based investment products) have in recent years offered very low if not negative returns, especially after deduction of fees 29 . 

Particularly costly are products that include the payment of inducements for financial intermediaries in the distribution process. Despite the existing safeguards to mitigate the resulting conflicts of interest, investors are still advised products that do not offer them the best value nor help them to achieve their long-term investment goals. The European Court of Auditors (ECA) concluded in its special report on investment funds 30 that investors were not sufficiently protected against, among other things, biased advice from financial intermediaries incentivised by inducements.

Jointly, these problems have the following consequences:

1.Investors may not be duly protected or treated fairly;

2.Some investors do not achieve good outcomes on their investment due to poor quality products, making it harder to accumulate capital to finance their retirement needs or other life goals;

3.As retail investors achieve suboptimal results and do not understand why their financial products did not yield a satisfying performance, their confidence in capital markets may be undermined and their willingness to invest in the first place discouraged; 

4.The resulting lower retail investor engagement may constrain efforts to achieve a more efficient, developed and integrated capital market within the EU.

Consumer organisations have long expressed concerns about consumer protection standards (one organisation set up a website displaying cases of financial detriment 31 ), however actual data covering cases of consumer detriment in financial services remains underdeveloped. While questions about consumer detriment are frequently asked in surveys, the wording of the questions differs, comparisons over time are generally not available and country rankings are dissimilar across surveys. Although the interpretation of such diverse survey data is difficult, the results suggest that distrust in retail investment markets is present everywhere and that a non-negligible share of investors have experienced frustrating experiences. In both the OECD/INFE 2020 survey and the 2022 Eurobarometer on retail financial services, the share was 3.7% as an average of participating EU Member States. In a study 32  for the Commission in 2018, more than half of the surveyed consumer protection bodies reported having received frequent complaints about unsuitable products and inappropriate advice. National competent authorities receive a considerable number of complaints about poor investment advice and mis-selling, which further illustrates the presence of consumer detriment on retail investment markets 33 .

CMM European Commission’s consumer market monitor, OECD (2020) is the OECD/INFE 2020 International Survey of Adult Financial Literacy. EB is the Eurobarometer Flash No 509/2022, RIS the Retail investment study. Numbers were obtained by deducting the country observation from the sample’s average and divide this difference by the sample’s standard deviation.

2.2 What are the problem drivers?

Problem 1 – Informational deficiencies

Problem driver 1: information provided to investors is not always useful or relevant for their decision-making process

Current EU legislation imposes obligations on firms and their intermediaries to provide ex ante and ex post information about retail investments to their customers. Disclosure requirements are intended to alleviate the information asymmetry between financial service providers and retail clients by ensuring that retail investors receive clear and comparable information, which would ultimately help them to make an informed choice. However, the relevance of disclosures is inherently limited by the fact that not all consumers are able or willing to read and understand this information.

Specific disclosure requirements are laid down across different legal instruments including sectoral, product and horizontal consumer protection legislation (e.g. PRIIPs, UCITS, MiFID, IDD, Solvency II, DMFSD, the Prospectus Regulation, etc.).

The evaluation of the legal framework, supported by evidence from the Retail investment study, concluded that while EU disclosure rules have generally led to improved (notably in terms of completeness and clarity of information) and more comparable documents for retail investors, the existing requirements do not always help them make informed investment decisions. The following reasons have been identified (see Annex 4 for a more detailed analysis):

a) The information provided is complex and not sufficiently engaging for retail investors.

Retail investors currently receive abundant information about different (key) aspects of investment products and services. While this may be useful for financially literate consumers and relevant from the point of view of consumer protection (for instance in the case of mis-selling and litigation), or may serve supervisory objectives 34 , in other cases such comprehensive disclosures may be of limited usefulness in supporting retail investors in their decisions, as they are too complex to be read and understood by many. EIOPA concluded in its advice that “…despite existing obligations for disclosures to be fair, clear and not misleading, the use of jargon or unnecessarily complex terminology is still prevalent, and information is not necessarily presented in a clear or engaging way to consumers” 35 . Respondents to the public consultation indicated that disclosure documents for retail investors were overly elaborate (even for simple products), complex and too technical, potentially leading to information overload 36 .

The Retail investment study also underlined that disclosure documents “are rarely engaging and that their layout is frequently very dense” 37 and that in practice consumers often did not read them. In particular, the study concluded that costs disclosure rules and practices were complex and sometimes inconsistent, making use and comparison of this information challenging for retail investors. For example, retail investors faced multiple cost items in the vast majority of product information documents that were reviewed. The behavioural experiment in the Retail Investment study showed that even when using simplified information documents, a significant proportion of consumers was not able to choose the most financially advantageous product for them in terms of costs 38 .

b) Disclosures to investors are not adapted for the digital environment.

The EU legal framework (see Table 1) provides for comprehensive requirements on the type of information and the way that information should be provided to retail investors. Increased digitalization and the development of new technologies and tools are transforming how financial services are provided. Financial service providers are changing the way they interact with their (potential) clients, and these new trends enable them to adopt new approaches 39 . However, the existing disclosure requirements do not fully cater for these new trends and evolving user needs and expectations (notably from younger generations of investors). The PRIIPs framework also does not provide for a sufficient level of flexibility to allow for the presentation of information from the key information documents to retail investors in a layered way 40 , which can be considered a regulatory gap. The size of these problems cannot be measured, but they pose inconvenience to users and reduce willingness to read key information documents 41 .

In the evidence presented by the Joint ESA advice on digital finance, respondents to the surveys and interviews expressed concerns that the EU disclosure framework was potentially outdated, which could hinder the ability of consumers to make informed decisions about products and services 42 . The ESAs concluded that digitalization trends are not adequately captured and although the current framework is “supposed to be technology-neutral, it was mainly designed without considering digital distribution, and certainly before the “app-revolution” 43 . Likewise, the Retail investment study suggested putting greater emphasis on the digital environment 44 .

c) Insufficient ex post information on costs and performance.

While many regulatory disclosures focus on the pre-contractual stage, the periodic ex post disclosures to retail investors, focusing on the costs and performance of the products in their portfolio, are more limited. As identified in the EIOPA advice on retail investor protection, in the area of IDD, some Member States have developed national practices beyond the outdated rules in Solvency II, but there is currently no common standard for ex post periodic disclosure in EU legislation which would improve the comparability of different IBIPs and help inform investors of the costs and performance of their portfolio. In addition, both the MiFID and IDD rules 45 require investment firms and insurance distributors to provide investors with annual information on costs and charges related to financial instrument(s), investment and ancillary services and IBIPs. However, as regards investment services, this requirement only applies to situations where there is an ongoing relationship between the client and the investment firm and does not cover in the same report the performance of the portfolio of the investor, taking into account the performance of the financial products and the costs and fees borne by the investor.

As a result, a significant group of investors does not receive appropriate ex-post information in an easily accessible and comprehensible way, which limits their possibilities to effectively monitor the developments of the investment product purchased, including performance and costs paid.

d) Limited visibility and comparability of Environmental Social and Governance (ESG) information in standardized disclosure documents.

The increasing demand for sustainable investment, that takes account of ESG risks or impacts, is not adequately reflected in key information documents for retail investors, in particular in the PRIIPs key information documents 46 prepared under the PRIIPs legal framework. This represents a regulatory gap with respect to changing expectations of consumers regarding the role of disclosures. Under the Sustainable Finance Disclosure Regulation (SFDR), new information must be collected by financial product manufacturers and presented on their websites, notably on the treatment of sustainability-related risks and principal adverse impacts of investments. Such disclosures may be rather complex for retail investors to navigate and may not be sufficiently visible to them. While current provisions allow for the inclusion of some additional information in the PRIIPs key information documents, there is no guarantee that without further policy intervention this will happen systematically and coherently in a way that facilitates comparability of retail investment products based on their ESG characteristics. Unless specified in law, there is a significant risk that different providers would prioritize different information, which may make it harder for retail investors to compare products based on such information.

Problem driver 2: retail investors tend to be unduly influenced by enticing marketing communications through digital channels and misleading marketing practices

Marketing communications can play a key role in determining consumer behaviour and influencing investment decisions. Retail investors who are subject to misleading marketing communications are more likely to be mis-sold an unsuitable/inappropriate financial product or service, even where correct information is provided through regulatory disclosures 47 . There is a growing trend towards marketing through digital channels, which brings certain benefits but also risks 48 to retail investors, including the risk of biasing investors’ choice, unsolicited offers, offers targeting an inappropriate segment, a push towards unsuitable products, increased misconduct, as well as difficulties for competent authorities to control digital marketing and enforce the relevant rules.

Online platforms closed fora such as (moderated) chat groups, and influencers (or “finfluencers” 49 ) are an increasingly important channel to inform and influence retail investors 50 . Financial influencers in particular have received much attention in recent years, although they represent only one of many new digital phenomena.

The current rules require inter alia that marketing communications are clearly identifiable as such and that the information they contain is consistent with any information the firm provides to clients in the course of providing investment services.

Several shortcomings have been identified with respect to the application of the existing framework, indicating that it is not yet fully able to address all the challenges of these new trends:

1.Marketing communications, particularly in the online environment, may tend to overemphasize the potential benefits of the product and hide information on costs and risks 51 .

2.There may be confusion with respect to the definition of marketing communications as to whether online advertising and firms’ private messages to clients and potential clients on social media are covered 52 , both when communicated directly by the firm or through third parties’ social media (i.e. ‘finfluencers’ who operate on behalf of financial service providers). NCAs are also facing significant challenges in monitoring new forms of marketing communications, for instance as regards the use of finfluencers by firms or other developing means to engage clients via third parties through social media 53 . ESMA and EIOPA consider that greater control and oversight by investment firms and insurance companies is needed on marketing communications to ensure a consistent approach across all Member States.

3.The existing powers of NCAs to tackle aggressive online marketing practices may not allow sufficiently timely intervention 54 , nor the possibility for NCAs and ESMA to impose the use of risk warnings for specific risky financial instruments which may be subject to (aggressive) online marketing and advertising campaigns 55 .

A majority of respondents to the public consultation considered that there was a need for further EU coordination/harmonisation of national rules on online advertising and marketing of investment products 56 .

Problem 2 – Shortcomings in the investment product manufacturing and distribution processes

Problem driver 3: some retail investment products incorporate unjustifiably high levels of costs and/or do not offer value to retail investors

High fees reduce the return retail investors can earn from their investment and the benefits they can draw from them. The challenge for retail investors to assess whether they get good value for money increases in case of complex fee structures. Both ESMA and EIOPA concluded in their monitoring of investment performance and costs that the high level of costs charged to retail investors can significantly impact risk-adjusted net returns and diminish the investment outcome for final investors. Product Oversight and Governance (POG) rules, such as in MiFID and IDD, aim to ensure that the interests of customers take prime importance during product design and throughout the lifecycle of a financial instrument/product, including arrangements for its distribution. Similarly, both the UCITS and AIFM Directives contain requirements stipulating that investors should not be charged undue costs. However, as evidenced in both EIOPA’s 57 and ESMA’s 58 annual cost and past performance reports, even with such rules, some products offered to retail investors offer very low if not negative returns (net of costs charged to the customer), calling into question whether they in fact represent value for money. The Evaluation (Annex 11) has found that product manufacturing process and rules governing the distribution of retail investment products do not fully tackle the issue of cost-efficiency of products and are not sufficiently effective to ensure that retail investors are offered products that are cost efficient. The evaluation of additional rules under the UCITS framework has also indicated limited scope for improvement, although the majority of the costs charged to investors are not under the control of UCITS management companies 59 .

EIOPA found that some investment products sold to retail investors generate extremely low or even negative real returns, disproportionate to the risk that is taken by the investor. EIOPA identified such insurance products particularly in low-risk classes. Net returns were mostly in the range -1% to 6% for unit-linked and -1% to 3% to hybrids products 60 .

ESMA’s cost and performance report documents the substantial variation of costs of funds marketed to retail investors across EU Member States (see figure below), suggesting that there is little cost pressure from cross-border competition. It also found that retail clients were charged on average around 40% more than institutional investors across asset classes in 2021 61 . Although some difference between investor groups is to be expected, the size of the difference appears excessive. ESMA’s simulations yielded negative returns for a number of structured retail products once costs were taken into account (see figure below). There does not appear to be a strong correlation between total costs and the underlying asset type, and as total costs do not appear to be lower for products that are more often sold to retail investors, this would suggest that “economies of scale do not appear to materialise in the market for SRPs” (structured retail products) 62 .

Figure 1: Cost differences when investment funds are charged to either retail investors or institutional investors,

Note: Sum of subscription fees, ongoing costs and redemption fees.

Source: ESMA 2022 Cost and Performance report, with data from ESMA and Refinitiv Lipper

Figure 2: Returns of structured retail investment products across payoff types in the moderate scenario

Note: Means and ranges of returns of various structures retail investment products.

Source: ESMA 2022 Cost and Performance report.

Structured retail investment products often feature high complexity that prevents retail clients from understanding whether high fees reflect high quality or are instead due to high costs or profit margins. They have no means to judge the extent to which misaligned incentives between product manufacturers and distributors (which are both profit maximising entities) are driving high fees and the selection of products offered to them.

ESMA found, in its 2021 common supervisory action 63 , that while firms generally follow the ESMA guidelines, the definition of target market is sometimes a formalistic exercise, made at insufficient granularity and which does not always translate into a distribution strategy that enables the product to reach the identified target market. In particular, product “manufacturers’ procedures insufficiently describe how a product’s cost structure is evaluated to ensure compatibility with the product’s target market”. ESMA stressed that the requirement on manufacturers to perform a charging structure analysis 64 is a key investor protection requirement. Similarly, EIOPA issued a supervisory statement concerning the assessment of value for money of unit-linked insurance issues, such as: “high complexity, mis-selling, mismatches between actual returns and customers’ expectations products that are not designed in a customer-centric manner” 65 . 

Despite the efforts of ESMA and EIOPA, the current rules addressing the product manufacturing process and rules governing the distribution of retail investment products do not fully tackle the issue of product cost-effectiveness and fail to ensure that retail investors are offered products which provide value for money. The rules are not sufficiently granular in relation to cost factors, which is problematic for their monitoring and enforcement. An additional practical consideration is that the lack of available cost information relating to investment products further increases difficulties to apply the rules, as assessments around cost effectiveness may be perceived as arbitrary if they are not based on data comparison and objective benchmarks. That poses a challenge with respect to their enforceability.

Problem driver 4: conflicts of interest caused by the payment of inducements negatively affect the quality of investment products offered and investment advice

Under certain circumstances, current rules (under MiFID II and IDD) allow for the payment of fees, commissions or the provision of non-monetary benefits (so called “inducements”) to financial service providers by third parties (typically the manufacturer of the product). These rules provide the basis for the “commission-based” distribution model of retail investment products, whereby financial intermediaries (e.g. financial advisors) are remunerated for their services not by the retail investors directly, but by the manufacturers of those products. The rules do not, however, exclude a purely “fee-based” model, whereby financial intermediaries (e.g. independent financial advisors) are only paid directly for their services, including advice, by the retail client. Under MiFID II rules, an advisor that informs his clients that the investment advice is provided on an independent basis, cannot accept commissions from third parties but needs to rely on fees from the client. The “fee-based” model has had limited uptake in the retail segment however and the “commission-based” model is currently predominant for the distribution of retail investment products in the EU 66 .

Conflicts of interest at the level of the distributor are inherent in the “commission-based” distribution model, as financial intermediaries receive remuneration from persons other than the retail investor for the products they are recommending and selling. These conflicts of interest can be significant, since remuneration through inducements can represent an important portion of the incomes of intermediaries and the volumes of sales can also influence the bonuses paid to advisors. As an illustration, a survey 67 conducted by the Swedish supervisory authority concluded that commissions accounted for a very large proportion of the revenues of most intermediaries in Sweden. Insurance intermediaries derived 99% of their total revenues from commissions, which were also an important source of revenues for intermediaries selling securities. The Retail investment study established that non-independent advice remains the prevalent model for most distributors of retail investment products in the EU 68 , suggesting that revenues from non-independent advice constitute a large portion (if not a sole stream) of revenues from advised services for most of the intermediaries.

Both the Evaluation and the Retail investment study have identified significant shortcomings with respect to the way the existing rules on inducements work in practice. They have underlined, among other things, that information documents provided to consumers rarely contain explicit information about inducements. According to the findings of the Retail investment study, while the disclosure of inducements reduces the information gap it appears not to substantially influence a consumer’s choice and only a minority of consumers actually understand the concept. The existing safeguards, such as the quality enhancement requirement under MiFID II, lead to different interpretations across Member States and firms, despite convergence efforts by ESMA. A number of studies 69 have identified shortcomings in the application of these rules. It is thus clear that the current protections in the legal framework and the way they are applied have not resulted in a market with lower inducements and better value products for retail investors, nor have they triggered a shift towards more independent advice 70 .

Consumer and financial user organisations 71 have complained that the existing safeguards do not sufficiently mitigate the sale of investment products and services to retail investors that are not suited to their needs and/or which are too costly or underperforming. The ECA underlined also that investors were not sufficiently protected against, among other things, biased advice from financial intermediaries incentivised by inducements 72 .

Inducements form a significant part of the overall product costs charged to retail investors and as such contribute to a higher level of fees for retail investment products. A study conducted by EFAMA 73 shows that distributors receive around 38% of the costs paid by retail investors through retrocessions for actively managed funds. According to a survey conducted by ESMA, the amount of inducements paid in some markets can be significantly higher, with retrocessions in France amounting on average to 50% of the management fee and with distribution costs in Spain ranging on average between 50% and 80% 74 . A study conducted by KPMG on behalf of a number of banking associations 75 also shows that inducements are a significant factor in the overall costs charged to retail investors, equalling 100% of the entry fees and on average between 49 and 51% of the yearly ongoing fees. Conversely, evidence suggests that in jurisdictions where the payment of inducements has been banned (such as the Netherlands), retail investors are accessing more cost-efficient products with consistently lower levels of fees across asset classes for investment funds 76 . The Retail investment study found that products carrying inducements are on average between 24 and 26% more expensive than those investment products on which no inducements are paid 77 .

The higher fees charged to retail investors have a significant impact on the net return on investments. ESMA indicated in its 2019 Cost and performance report 78 that for UCITS funds, the total costs present a significant drain on the fund performance, impacting retail investors to a much higher extent than institutional investors (as retail clients on average pay twice as much as institutional clients), with costs on average accounting for 25% of gross returns in the period from 2015 to 2017.

The existence of conflicts of interest in the distribution of retail investment products through the payment of inducements and other monetary incentives, causes product bias (i.e. inducements influence the choice for a certain product). This impairs the efficiency of the retail investment market by making it more difficult for retail investors to access more cost-effective products 79 . The resulting biases and inefficiencies can hinder retail investor participation across Member States by undermining retail investors’ trust in capital markets and have a negative impact on the internal market for financial services.

With respect to insurance-based investment products (IBIPs), a report by EIOPA 80 found that monetary incentives from asset managers (managing the assets of unit-linked insurance products) to insurance companies are widespread and significant in the industry, totalling EUR 3.7 billion in 2015. According to EIOPA, monetary incentives and remuneration received represent a median value of 0.56% of assets under management (46% of total fund management charges) 81 . A majority of the insurance undertakings did not disclose these monetary incentives and remuneration nor passed on these incentives to their clients. According to EIOPA, these incentives may limit the choice for clients and result in poor investment outcomes, in particular for products with long investment horizons, as underlying investment vehicles may at times be chosen on the basis of the highest level of monetary incentives and remuneration rather than relevance or cost-effectiveness.

Evidence suggests that in many jurisdictions certain simple and cheap investment products have a limited market share and are seldom offered or recommended to retail investors, compared to more expensive and complex products. Commissions can be an important incentive to offer specific products (so-called product bias), for example, where the fund commission can be ten times higher for an actively managed fund as compared to an index fund, generating significant conflicts of interest 82 . The Commission’s study on distribution systems of retail investment products 83 found that ETFs 84 (which typically carry low costs) are amongst the most commonly available products on websites in many Member States but are almost completely absent from traditional distributors’ online offering in some Member States. Although marketed online, low-cost ETFs were almost never proposed in traditional physical advice distribution channels. The Retail investment study found that ETFs have gained market share in certain Member States (e.g. Finland, the Netherlands and Poland), but remain marginal in other countries such as France 85 , where comparatively more expensive products, such as life insurance, were advised in the majority of cases 86 . While it is clear that these pricier products carry different features and benefits which may be suitable for different groups of retail investors, desk research, based on data provided by ESMA and EIOPA provides an illustration as to how an investor investing EUR 10,000 in a unit-linked product in the period between 2014 and 2020 would have achieved a significantly lower outcome than by investing in ETFs (EUR 2,200 versus EUR 7,600) 87 .

The Retail investment study pointed also to challenges regarding inadequate advice and listed a number of studies which evidenced the selling of investment products to clients that were not suitable for their profile 88 . At the same time the importance of unbiased advice was emphasised, as consumers tend to trust advisors and follow their advice, even when that advice may be evidently inadequate (as evidenced by a behavioural experiment conducted as part of the study) 89 . EIOPA has expressed concerns relating to the possible mis-selling of unit-linked products to consumers featuring high costs and commissions as well as complex structures 90 . It also pointed to the need to tackle damaging conflicts of interest and address the risk of inducements that lead to product bias and materially impact the cost-efficiency of investment products 91 .

Finally, the Evaluation points out that the divergences in inducement rules between MiFID and IDD, coupled with differences in the way these two frameworks are applied, cause market fragmentation and an unlevel playing field between distribution channels and Member States. In practice, different standards and levels of protection apply to retail investors, depending on whether a specific product (e.g. a UCITS fund) is distributed by an investment firm or an insurance undertaking (e.g. as part of a unit-linked product). Many Member States have also introduced stricter national rules on inducements under IDD and some also under MiFID (e.g. the Netherlands). On the one hand, this creates an unlevel playing field for financial service providers. On the other hand, in a cross-border context, it may expose retail investors in host Member States to different, potentially weaker, levels of investor protection. As cross-border distribution of certain retail investment products (e.g. UCITS funds 92 ) increases, such divergences can negatively impact the internal market for financial services.

2.3 Problem Tree

2.4 How likely is the problem to persist?

If no action is taken to remedy the identified problems, retail investors will continue to purchase investment products which do not best serve their interests and deliver poor outcomes, undermining investor confidence and indirectly impacting the level of retail investor participation in EU capital markets.

If the identified informational deficiencies remain unaddressed, the framework will not provide a clear basis for the provision of less complex information to retail investors focusing on essential elements of the investment products, nor for the more meaningful presentation of disclosure information, particularly through digital means. Many retail investors will continue to not read nor understand the information received, affecting their ability and willingness to invest. The growing risk that marketing communications, especially through online channels, play on cognitive biases of retail investors and unduly influence their decisions will remain unmitigated.

In the absence of stronger requirements for product manufacturers and distributors at the product oversight and governance (“POG”) stage, which focus on the cost-efficiency of investment products and their capacity to generate value for retail investors, the risk will persist that investment products are brought to market which carry an unjustifiably high level of costs or do not offer value to retail investors. As information asymmetry between the retail clients and intermediaries can never be fully eliminated, such products will continue to be purchased by retail investors, leading to lower returns and consumer detriment. Considering the problems on the market which have repeatedly been signalled by ESMA and EIOPA, an improvement of the existing situation is highly unlikely without a regulatory response.

Conflicts of interest due to the payment of inducement, if not addressed, will also continue to negatively affect the quality of the advice and products offered to investors. The commission-based model and non-independent advice will remain the predominant models in the EU with the continued risk that incentives at the level of intermediaries lead to the sale of investment products and services that are not suited to the needs of retail investors or are too costly or underperforming. This will continue to have a distorting effect on the market, as retail investors are not necessarily offered or do not purchase the best or most suitable products for their situation.

The identified problems are currently causing retail investors to take investment decisions where they opt for excessively costly, underperforming or excessively risky products, with severe negative consequences for their investment return. As a consequence, investor confidence is likely to be impacted and potential retail investors may be reluctant to invest in EU capital markets. The impediments to an efficient and dynamic EU retail investment market will also remain.

3.Why should the EU act?

Legal basis

Retail investor protection rules are spread across a range of legislative initiatives, as described under section 1.3. The legal bases governing these different instruments are Articles 114, Article 53, and Article 62 of the Treaty on the Functioning of the European Union (TFEU).

The primary policy measures under consideration concern the following areas: (i) disclosures and marketing communications, (ii) inducements, and (iii) value for money. Further flanking measures are assessed in the areas of: (i) financial literacy, (ii) client categorisation, (iii) suitability and appropriateness assessment, (iv) supervisory enforcement, and (v) professional qualification of advisors. As set out in section 4.2, these measures collectively target informational deficiencies which hinder investors’ ability to make well-informed decisions as well as shortcomings in the investment product manufacturing and distribution processes, across Member States. In order to ensure consistency and coherence of the envisaged measures, it would be appropriate to amend the existing framework (i.e. MiFID II, IDD, PRIIPs, UCITS and AIFMD).

Article 114 TFEU empowers the European Parliament and the Council to adopt measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market. The measures identified above and throughout this impact assessment relate to improving the conditions for the establishment and functioning of the internal market. These include the establishment of uniform conditions for all relevant players in the retail investment market while ensuring a consistent degree of consumer protection across the EU. These harmonised operating conditions include: the way retail investors in the EU are informed about investment products, how the information is provided to them, and how manufacturing and distribution processes of investment products take place. While there is an increasing amount of cross-border trade in retail investment products, divergent national approaches will lead to different levels of investor protection, which represents an impediment to the further cross-border development of the retail investment market. Such further development would also require easy comparisons between products across the EU. Divergent standards on investor disclosure make such comparisons very difficult and would therefore also create an obstacle to the further development of the internal market for retail investment products. Insofar as measures are intended to further enhance consumer protection across the EU, Article 169 TFEU would also be relevant. Article 169 TFEU allows the EU to adopt measures pursuant to Article 114 TFEU “in order to promote the interests of consumers and to ensure a high level of consumer protection […] as well as to promoting their right to [inter alia] information [and] education […]”.

Article 53 TFEU would also be relevant for the introduction of the measures set out in this impact assessment. Article 53 TFEU empowers the European Parliament and the Council to issue Directives aimed at making it easier for persons to take up and pursue commercial activities across the EU. The objective and subject matter of policy options considered in this impact assessment relate to harmonising national provisions concerning conduct of business rules for manufacturers and distributors of investment products. In particular, these are to harmonise safeguards against possible conflicts of interest, rules on qualifications of advisors, rules intended to provide investors with greater visibility over all costs relative to an investment product, and the supervisory framework. Article 62 TFEU, which extends the scope of activities identified in Article 53 to the provision of services, would also necessarily be relevant.

Subsidiarity: Necessity of EU action

EU action for completing the internal market has to be appraised in light of the subsidiarity principle set out in Article 5(3) of the Treaty on European Union (TEU). According to the principle of subsidiarity, action at EU level should be taken only when the objectives of the proposed action cannot be achieved sufficiently by Member States alone and thus mandate action at EU level.

The legal framework governing retail investor protection is extensive and largely harmonised at EU level. Notwithstanding this extensive body of legislation at EU level, the evidence gathering exercises have identified a number of significant shortcomings, in particular with respect to the way retail investment products are distributed and the way information is provided to retail investors. Action is required at EU level as the options considered in this impact assessment necessitate the modification of the existing legal framework, consisting of EU Directives and Regulations. Individual initiatives at Member State level are therefore not suitable, insofar as the proposed amendments will be made to EU Directives and Regulations and consequently beyond the scope of the legislative competence of Member States.

Proportionality: Added value of EU action

Ensuring a coherent investor protection framework that empowers consumers to take financial decisions and benefit from the internal market can only be achieved at EU level, in close cooperation with Member States.

As the current retail investor protection framework largely consists of different EU legal instruments, in order to address the problems identified in this impact assessment and to facilitate cross-border retail investor participation in the EU, this framework may only be amended at EU level to update investor protection rules. Acting at the EU level and harmonising the operational requirements of service providers as well as the disclosure requirements imposed reduces the complexity and administrative burdens for stakeholders and promotes financial stability.

4.Objectives: What is to be achieved?

4. 1 General objectives

The general objectives of the initiative are to strengthen the protection framework for retail investors to empower them when taking investment decisions and to ensure their fair treatment when using investment services in order to achieve better investment performance. The retail investment strategy also aims to improve the efficiency and integration of the internal market across all retail financial services.

4.2 Specific objectives

The retail investment strategy will contribute to the achievement of the general objectives by pursuing the following three specific objectives (SOs):

1.SO1: Improve information provided to investors and their ability to take well-informed investment decisions. The initiative aims to improve the legal framework by adapting disclosures to the digital environment, making disclosures more relevant for retail investors and ensuring retail investors receive marketing communications, also through online channels, that are relevant and not misleading.

2.SO2: Better align interests between intermediaries and investors. The improvements to the framework would ensure that the advice given to retail investors is not biased by monetary or non-monetary incentives provided by product manufacturers to intermediaries, is of good quality and adapted to their needs, preferences and objectives.

3.SO3: Ensure that retail investors are offered cost-effective products. A strengthened approach in the legislative framework based around the value offered aims to help retail investors achieve better returns and easier access to more cost-efficient retail investment products.

Links between general and specific objectives

The following table illustrates the intervention logic that explains how the problems and associated problem drivers lead to the main options that are assessed. In addition, this impact assessment addresses a number of flanking measures for targeted improvements of the existing retail investor protection framework to help address identified shortcomings which are assessed in the accompanying annexes.

Intervention Logic

5.Description of the policy options

How is the assessment of policy options structured?

The Retail investment strategy takes a holistic approach, featuring a variety of measures aimed at addressing the identified problems. All measures included in the impact assessment (and the annexes) are aimed at enhancing the retail investor protection framework. The focus of the main part of the impact assessment report is on policy options in three principal areas, i.e. (i) disclosures and marketing communications, (ii) inducements and (iii) value for money. This choice of presentation is intended to enhance the readability of the main text and to ensure focus on the most important policy choices that directly target the two key identified problems. The selection of key issues was decided on the basis of the magnitude of their expected impacts, the political sensitivity of the underlying measures, as well as the significance attached by stakeholders to the issues concerned.

Specific elements relating to these policy options are further developed in a number of annexes attached to this impact assessment (e.g. Annex 4 contains more detailed assessment of the options for dealing with disclosures and marketing, while Annex 7 contains further assessment related to inducements).

A number of measures are presented as “flanking measures” and their impact is assessed in specific annexes, i.e. (i) financial literacy (Annex 5), (ii) client categorization (Annex 6), (iii) enhanced suitability and appropriateness assessment (Annex 8) and (v) professional qualification of advisors (Annex 10). While these measures will also contribute to addressing the identified problems and meeting the general and specific objectives, their impact is expected to be less significant than the policy options presented in the main body.

Finally, a focus on supervisory enforcement alone would not be sufficient to address the problems identified in the three principal areas in this impact assessment. It is therefore appropriate to look at supervisory enforcement in view of its cross-cutting nature and assess specific targeted supervisory enforcement measures aimed at improving the level of retail investor protection. These measures would (indirectly) contribute to addressing the identified problems (e.g. in the area of disclosures and marketing communications), and have been assessed jointly in Annex 9 as flanking measures.

The flanking measures in the annexes should be viewed as part of the overall package, conceived in conjunction with the main measures. Collectively, they contribute to addressing the identified problems and meeting the general and specific objectives. Taken in isolation, however, they would not be sufficient to fully address the core problems identified in the main part of the IA. They are complementary to the main policy options, creating synergies with a view to creating a strengthened overall investor protection framework or by complementing specific policy options (these are presented in section 7 in the preferred combination of options).

5.1 Baseline

Under the baseline scenario, no amendments will be made to the legislative framework governing disclosures and marketing communications under MiFID, IDD and PRIIPs 93 , to rules governing inducements and product oversight and governance rules under MiFID, IDD and UCITS.

The principle characteristics of the baseline scenario are:

Increasing digitalisation of financial services and development of new technologies has changed and continues to change the financial services landscape and the way products are distributed to clients. On the one hand, there is a sustained and continuous increase in the number of products being sold online, and new ways to access advice, such as robo-advice or other digital advice models. The market share of such distribution models is growing, while traditional distribution channels are changing to adapt to more automated or semi-automated solutions. On the other hand, digital innovation is also changing the way investors access product and investment information and the way they are exposed to marketing communications. Mobile apps and the social media revolution are creating new opportunities for firms to reach existing and potential new retail clients, for example, through finfluencers. This however increases the risks that clients are unduly influenced or not sufficiently informed about costs, which would remain unaddressed in the absence of stronger and clearer regulatory requirements, as well as stronger powers for the NCAs to supervise and intervene 94 . Meanwhile, product manufacturers would likely not sufficiently exploit possibilities offered by digitalisation to present information from key information documents in a more user-friendly way.

Increasing interest in sustainability aspects. Increased citizen awareness about sustainability issues will continue to drive consumer preferences and market trends. Without policy intervention, some product manufacturers are likely to add sustainability information in key information documents, but there is no indication that the industry could clearly agree on which specific indicators should be included. Inclusion of sustainability aspects would likely be uncoordinated, thus hindering comparison of the sustainability-related characteristics of retail investment products.

Continued permissibility for firms to pay inducements to intermediaries under the current MiFID and IDD regimes and shortcomings in the application of existing rules will mean that the risk of conflicts of interest in the advice chain will remain, with the consequence that many retail investors risk being advised to purchase products that carry higher costs.

Continued exposure to high-cost products that deliver little value for money. The current actions by ESMA and EIOPA to develop guidance on value for money and undue costs are useful tools for supervisory monitoring and enforcement; however, there are limits as to how effective guidance can be as a means of addressing what is considered to be a significant problem. In addition, as shown in the evaluation, currently the rules are applied only superficially, and the existing enforcement mechanisms are not sufficient to address the problem.

Potential national gold plating: the current EU investor protection regime includes harmonised rules on inducements and advice, but with the possibility of gold plating, whereby Member States can introduce further restrictions on inducements at national level. This is an option that is already used in some Member States (See Annex 7.A and B). Even though there are no signs that other Member States would follow, a lack of consistency would give the possibility to firms for jurisdiction shopping and choosing to establish themselves in certain Member States and thus possibly distorting competition in the internal market.

Under the above scenario, where no changes are made to the existing framework, the identified shortcomings will remain unaddressed. Relying on existing enforcement mechanisms would not be sufficient to tackle the identified problems and would not provide sufficient flexibility for user-friendly display of product information to help address informational deficiencies, ensure that the offer of products and services is aligned with the interests of retail investors and offers them value.

5.2 Disclosures and marketing communications

The options that are assessed under disclosures and marketing are complementary and not mutually exclusive. Alternative options addressing the relevant problem drivers have been considered but discarded at an early stage (see below). The two complementary options presented below are assessed against the baseline, with a more detailed assessment to be found in Annex 4.

Policy option 2: Targeted changes to disclosure rules to improve their relevance for retail investors

Policy intervention under option 2 would focus on targeted changes in EU legislation (PRIIPs, MiFID 2 and IDD) to address problem driver 1.

With regard to PRIIPs, this option would involve the following targeted amendments, including to the PRIIPs Regulation, to address key areas highlighted by the Joint ESA advice on the review of the PRIIPs Regulation and responding to a mix of regulatory gaps and implementation issues identified in the evaluation: (i) improving the presentation of information, notably through use of information layering 95 and a summary dashboard to make PRIIPs key information documents more engaging; (ii) adding an ESG dashboard with basic information on the sustainability-related characteristics of the product, based on information already collected and disclosed under SFDR requirements and consistent with the sustainable finance disclosure framework; (iii) increasing transparency of costs of Multi-Option Products (MOPs) 96 in PRIIPs key information documents; and (iv) clarification of the scope of PRIIPs with respect to certain types of corporate bonds. The latter two technical measures are described and assessed in Annex 4.

With respect to MiFID II and IDD, option 2 would involve targeted amendments focused on improving the relevance of costs and performance disclosures for retail investors. This option would encompass an obligation for investment firms and insurance undertakings to provide their retail clients with information on costs 97 presented in a standardised and easy-to-understand format, before the execution of any transaction. This option would also reinforce firms’ obligations to provide an annual statement to clients, to ensure that each year all clients receive on a compounded basis a better view of the costs they have paid, together with, where applicable, any dividends or interests received, the current market value of the products and the impact of the costs on the annual performance of the portfolio. Since insurance-based investment products are typically long-term investments with a retirement or other long-term objective, the annual statement for such products would also contain additional elements, such as adjusted individual projections allowing investors to check whether they are on track to meet their objectives. Standardisation of the costs terminology and the costs statement format would facilitate the comprehension and comparability of those costs by an average retail client. Several additional technical changes to the rules are described and assessed in Annex 4.

Where the rules would require more technical specifications, these would be developed through mandates to the relevant ESAs.

Policy option 3: Targeted changes to address informational deficiencies relating to marketing communications

Option 3 encompasses legislative changes in MiFID II and IDD relating to marketing communications, as recommended in the ESMA and EIOPA advice on retail investor protection. This would involve the introduction of a new obligation for investment firms and insurance intermediaries to include “vital” information in all marketing communications relating to the offer of financial instruments and investment services to retail clients. Vital information would encompass the essential characteristics of the product or service presented in the marketing communication. For financial products, it would include at least the key product features and the main risks associated with them. The presentation of the vital information in the marketing communication would ensure that prominent information is accessible for an average retail client, regardless of the means of communication used. The Commission would be empowered to adopt a delegated act to define such vital information.

In addition, the notion of “marketing communication” would be clarified in MiFID II and IDD with a view to ensuring that all online marketing communications and advertising, made directly or indirectly by investment firms (including through third parties, such as influencers), regardless of the format or the use of any marketing techniques, are covered by the rules on marketing communications under MiFID II and IDD. Where the rules would require more technical specifications, these would be developed through mandates to the relevant ESAs. The supervisory role for NCAs to address aggressive marketing and impose risk warnings would also be strengthened (see Annex 9).

Options discarded at an early stage:

Improving the relevance of disclosure documents through a more comprehensive review of the PRIIPs framework. Some stakeholders suggested to go beyond the targeted changes included in Option 2 and to envisage a comprehensive review of the PRIIPs framework. However, a comprehensive review has been discarded as a policy option for the following reasons: the evaluation concludes that overall, disclosure rules, including those under PRIIPs, have been effective in increasing investor protection and providing retail clients with more complete, relevant and comparable information on investment products. Option 2 hence focuses on those specific issues that have been identified by the evaluation as needing to be remedied. Secondly, the timing would not be appropriate for a comprehensive review, as feedback received in the public consultation points to a high degree of regulatory fatigue in the sector; more ambitious rules changes would add to this. The content and presentation of performance scenarios and costs in the PRIIPs key information documents have been recently amended through secondary legislation, applicable as of January 2023. PRIIPs has started to apply to UCITS funds as of the same date and it will therefore take several years before sufficient experience is accumulated to assess these changes.

Several alternative options have also been considered to address the identified informational deficiencies relating to marketing communications. One option included the introduction of an obligation for investment firms to transmit to their relevant competent authorities all marketing communications (including those made though digital channels and those produced directly and indirectly by firms) related to financial products and the services they commercialize, prior to their release to the public or to individual clients. Another option entailed the introduction of an obligation for pre-approval of all marketing communications (including through digital channels) by the relevant competent authorities (as currently applied in some Member States in relation to certain marketing communications). Both options are likely to imply significant costs for the industry, which could ultimately be passed onto retail investors and outweigh any potential benefits. They are also likely to involve costs and the need for additional resources for the competent authorities. These options were thus discarded for reasons of proportionality.

5.2 Inducements

Option 2: Maintain the current system allowing for the payment of inducements, but improve/harmonize sector specific disclosures relating to inducements

Under this option, the existing legal requirements on the disclosures of inducements would be reinforced to make them more transparent, accessible and understandable for an average retail client. Distributors would be required, in addition to existing disclosure requirements on inducements, to disclose more prominently and clearly the level of inducements and provide a clear explanation in layman’s terms what they mean for the client (concept, consequences and graphical illustration showing the accumulated effect of inducements over time). Distributors would also be required to disclose to consumers the possible choice of alternative distribution channels where no inducements are paid. Firms would be required to report the inducements paid and received to the NCAs, who on their side would report those to ESMA/EIOPA. This option would, as regards the additional disclosure requirements, also create a level playing field across sectors (IDD/MiFID).

Option 3: A ban on inducements

Under this option, the payment of inducements (i.e. any fees, commissions or any monetary or non-monetary benefits paid or provided by any third party or a person acting on behalf of a third party in relation to the provision of the service to clients), would be prohibited in relation to all retail investment products and services across the Union. Investment intermediaries, irrespective of the distribution channel or product (e.g. shares, bonds, funds, structured retail products, PRIIPs) would no longer be allowed to receive or pay any such inducements 98 . Instead, they would need to charge a clearly disclosed fee to the retail client for their services 99 . This option would also provide safeguards against intragroup inducement-like payments (in the form of cross-subsidies to distributing entities from other group entities), so that vertically and non-vertically integrated providers could compete on equal terms (see chapter 6). To address conflicts of interest also at the manufacturing stage, product manufacturers of structured products, including IBIPs, will not be permitted to receive or pay commissions from or to other product manufacturers for the inclusion of a particular asset in packaged retail investment and insurance products (PRIIPs). This option would be accompanied by an appropriate transitional period, to allow distributors and manufacturers time to adjust their business models from a commission-based to a fee-based model, and a grandfathering clause to ensure that obligations under existing contracts with retail investor would not be affected.

A variant of this option could be to introduce a partial ban restricting payment of inducements for non-advised services (execution-only). Non-advised services are those where the intermediary does not provide investment advice to the client. A partial ban could cover payments and non-monetary benefits from manufacturers to distributors (or vice-versa) in relation to (i) the reception and transmission of orders, or execution of orders to or on behalf of retail clients, under MiFID, and (ii) non-advised sales under IDD. A partial ban would address the consumer detriment that may occur due to the payment of inducements in the context of execution-only services provided to self-directed retail investors that do not seek advice.

5.3 Value for Money

Option 2: Strengthen product governance rules for manufacturers

This option strengthens product governance rules under MiFID, IDD, and the UCITS and AIFM Directives to ensure greater attention to costs in relation to expected benefits in the design of products. As part of their product oversight and governance measures, manufacturers of investment products would be required to properly identify and quantify the costs related to each product (both for existing and new products) and justify that it offers value for money to the target market, including when compared to other products on the market, based on product type-specific cost and performance benchmarks (‘manufacturer benchmarks’). Products that manifestly underperform (in terms of costs and performance) compared to the relevant benchmarks would not be offered to distributors, or else manufacturers would have to justify their choice to still offer them. Product costs as well as objective reasons as to why some products should be retained (despite not being benchmark-compliant) would have to be properly documented and kept for supervisory scrutiny, upon request. Consequently, manufacturers would be encouraged to develop well-performing and cost-efficient products.

ESMA and EIOPA would be mandated to develop in a technical advice the criteria and elements upon which a value for money assessment would have to be based, including the methodology by which comparisons with other relevant products would be made and benchmarks construed in the level 2 measures to be adopted by the Commission. The number of relevant benchmarks would be determined by ESMA and EIOPA, subject to their detailed further assessment and sector consultations. The benchmarks would be compiled on the basis of cost and performance data and would need to differentiate between investments that carry different risk levels. Benchmarks would also need to be sufficiently granular, but also have enough products within one group, so as to represent a meaningful basis of comparison for similar product types and categories. In order to facilitate compilation of relevant benchmarks, manufacturers would be required to report relevant cost and performance related data to supervisors. To avoid an unnecessary reporting burden on stakeholders, the ESAs would have to consider the already collected data under any other EU legislation. ESMA and EIOPA would further specify the precise data to be reported for the compilation of the benchmarks. Benchmarks would need to be published and periodically updated.

Option 3: In addition to strengthening product governance rules for manufacturers (option 2), strengthen the rules for distributors

Under this option, the requirements for manufacturers would be strengthened as described under option 2. In addition, the product governance rules under MiFID and IDD for distributors would be enhanced. Distributors of investment products would be required to assess how the products they distribute compare to relevant benchmarks (‘distributor benchmarks’) for similar products in the market. Distributors should receive the relevant explanations and data from the manufacturer (including the cost justification of its product, and explanation of how concretely its product brings value to the target market) and would be required to include the additional costs related to distribution that are not known by the manufacturer. The assessment could be done at a central level (e.g. compliance department at the distributor’s headquarters) rather than at the level of individual advisors.

Similar to option 2, under option 3 distributors would not be able to offer to the client products that would manifestly underperform compared to the relevant benchmark, which would include distribution fees, unless they have objective reasons for doing so. Distributors would be required to document the result of their comparison to the relevant benchmarks, as well as the objective reasons in case of departures from the benchmark. They should disclose this documentation to supervisors upon request. Consequently, distributors would provide an additional discipline on manufacturers to develop cost-efficient and well-performing products.

As in the case of option 2, under option 3 the ESAs would be mandated to develop in technical advice ‘distributor benchmarks’ which would be distinct from ‘manufacturer benchmarks’, as they would also include distribution fees. To develop these benchmarks, the ESAs may need to collect additional data from distributors. ESMA and EIOPA would further specify the precise data to be reported for the compilation of the benchmarks.

It could be further envisaged, as a sub-option, to require distributors to explain the value proposition of the recommended product to the client and to disclose, as part of the suitability assessment, how the product compares to the ‘distributor benchmark’. This could help establish market discipline by ensuring that distributors scrupulously follow the assessment process. At the same time, the explanations given to the client would contribute to raising the awareness of clients and their financial literacy and enhance the quality of the advice to help ensure that only cost-efficient products are offered to clients. However, imposition of a such a requirement on distributors would entail significant and disproportionate additional costs, given the large number of distributors that would need to receive training and given the additional time needed to explain the value for money assessment to clients. This sub-option is therefore not analysed further in this impact assessment.

5.4 Flanking measures

As set out in the introduction to section 5, a set of flanking measures that contribute to addressing the identified problems and meeting the general and specific objectives is analysed in the corresponding Annexes. These measures would not be sufficient to fully address the identified problems, they are however an intrinsic part of the overall package and designed to work in conjunction with the main measures.

The “flanking measures” are described in the following table.

6.What are the impacts of the policy options and how do they compare?

In this section, each policy option considered (other than Option 1 – “Baseline”) is assessed against the specific objectives presented in Section 4. The baseline scenario (“Option 1” of each problem) is not assessed. The consequences of doing nothing are outlined in Section 2 of this impact assessment.

6.1 Informational deficiencies

Option 2: Targeted changes to disclosure rules to improve their relevance for retail investors

1.Benefits 

Improved presentation of the PRIIPs key investment document (notably layering of information and summary dashboard) would make it easier for retail investors to understand key characteristics of the investment product they are considering (e.g. its costs or risk level). This would contribute to some degree to facilitating the choice of a product that matches their needs. The introduction of an ESG dashboard would ensure that retail clients can clearly identify basic information on the sustainability-related characteristics of the products they own or consider buying. That information would enable better comparison of products on sustainability characteristics (due to standardisation) and give more prominence to sustainability information, in line with developing consumer preferences.

In the area of MiFID and IDD, the annual costs and performance statement and the standardisation of costs statements to retail clients would lead to greater transparency. The annual statement on costs and performance would enable all retail investors to get a comprehensive and detailed view concerning all the costs and performance associated with their investments over a one-year period. This annual statement would facilitate a better monitoring by the retail clients of the net performance of their financial products.

The creation of EU standardised cost statements, dedicated to retail clients and to be used by firms for the provision of cost disclosure before a transaction takes place or on annual basis, would facilitate the understanding of such statements by retail clients as well as the comparison of costs and charges of products. EU standardised cost statements would also facilitate the control over costs disclosures by supervisory authorities. They might also support a data basis on costs that could be useful for national competent authorities when controlling the value for money of financial products.

Enhanced transparency would reduce information and search costs for retail investors, allowing them to make investment decisions with more confidence. Lower information costs could also foster the participation of households that had not invested in financial products because they did not know how to invest. The 2022 Eurobarometer survey identified that 14% of those respondents that said they had no financial investment justified their behaviour on the grounds they did not know how to invest or found it too complex. While a mere 12% of the respondents to the RIS survey criticised the information provided in investment documents as bad, only 28% gave a positive assessment. These numbers are likely to improve with the measures discussed here.

It is however uncertain as to the extent to which more information would contribute to reducing the complexity of investment decisions, and there is an important interaction with the financial literacy of investors. The provision of information would have a greater impact if the information processing capacity of potential investors were to be strengthened.

There is however no data available that would allow to quantify the effect of lower information or search costs or better access to information on investors’ trust or participation. Data on financial literacy is still patchy, with the results of surveys available in only a few Member States and which are hard to compare over time.

The provision of more information is costly for financial firms, which entails passing on of costs from providers to retail clients and to firms that provide financial services, IT support or advisory services to financial firms. However, financial firms could benefit from the expansion of their customer base. More transparency may also lead to increased competition on the sell side, putting downward pressure on prices charged for MiFID and IDD products and services, thereby benefiting all investors. It could entice new competitors to enter the market.

2.Costs 

Companies that manufacture financial products in the scope of PRIIPs will bear the costs related to adapting their PRIIPs key information documents to the new rules 100 . These costs will be one-off in nature and are expected to be very limited as these companies already have the necessary procedures in place, and the changes are tailored so as not to require additional data. The changes are either related to presentation and format (e.g. dashboards, layering) or designed to make use of existing data (e.g. ESG dashboard) 101 . The use of layering and other online presentation alternatives will be voluntary, the costs of which will not be directly attributable to the proposed legislative changes 102 , although companies may face market pressures to apply them as well. The information to be included in an ESG dashboard would be limited to information that is already collected and disclosed by the PRIIPs manufacturer, implying no further cost implications 103 . No significant impacts are expected with respect to the ongoing costs of updating PRIIPs key information documents, as this option does not change the frequency of updating and as the additional ESG data would be already collected elsewhere. The targeted changes proposed only very slightly change the amount of information to be updated.

The introduction of the ex-post annual statement on costs and performance would deepen the existing disclosure obligations in terms of (i) content, by including the element of performance and payments received (in addition to costs) to all clients under MiFID and IDD and personalized projections in relation to clients under IDD, and (ii) the circle of clients receiving such annual statement under MiFID, since the obligation to provide an ex-post annual information would apply in relation to all clients (and not only to those with whom the investment firm has an ongoing relationship or are under portfolio management) 104 . The introduction of the ex-post annual statement would imply a one-off cost for the industry, consisting of costs for adjusting the existing (IT) systems, so that the new information elements could also be provided and that the statements would be extended to all clients. For an investor base of between 49-58.5 million retail investors 105 , these one-off costs could be estimated to be in the range of EUR 19 – 67.5 million (see Annex 4 for details) 106 .

Ongoing costs for investment firms and insurance undertakings are not expected to increase in relation to clients who already receive annual information, since after the adjustment of the systems, the information that is already available at the level of the firm (or easily retrievable from trading venues platforms/websites) could be provided to clients without any significant additional costs. This is particularly relevant for investment firms, who could incur an increase in ongoing costs in relation to clients who currently do not already receive such information (e.g. clients with whom the firm is not considered to have “an ongoing relationship”). For those clients, investment firms would incur new ongoing costs estimated at EUR 5 per client/per year. Considering the divergent interpretation and practices of the investment firms and Member States on the qualification of “ongoing relationship” in the context of costs disclosure (see above), it is not possible to estimate the number of new clients under MiFID who at present do not receive annual information on costs. 

It is not expected that there would be any material increase of costs for NCAs, as such controls already exist and existing IT tools should be able to absorb a larger amount of data. No significant impact is expected on the resources of ESMA and EIOPA, as their involvement and roles under this option can be performed as part of their existing regulatory and supervisory work.

Finally, this option would impose no new direct costs on retail investors, but there is a risk that investment firms and insurance companies may pass their additional costs linked to the provision of enhanced annual statements onto their retail clients via an increase of their investment and ancillary services costs.

The introduction of an EU template on costs disclosure, would imply a one-off cost for the industry to adjust existing (IT) systems to the new template. It may also require firms to adjust their costs strategy in light of this new format and the enhanced competition it might create. The exact impact will also depend on how the format is developed, which will be assessed in the context of the development of the relevant level 2 measure. No significant increase in ongoing costs is expected for investment firms and insurance distributors, as they are already under an obligation to disclose costs. These disclosures are aimed at achieving clear and unbiased information to clients, hence the associated costs relate to the substantive requirements of the proposal necessary for the fulfilment of the objective of informing retail investors. Nevertheless, they are categorised as administrative costs for “one in, one out” purposes.

3.Overall assessment: Effectiveness, efficiency and coherence:

With regard to effectiveness, the targeted measures on PRIIPs, MiFID and IDD would contribute to SO1 by making key features of investment products, including their sustainability profile, more visible and easier to understand. They would also help increase transparency on costs before and after an investment has been made as well as the annual performance of financial products, contributing indirectly to SO3. In this regard, Option 2 therefore presents an improvement over the baseline. Nevertheless, if applied alone, these measures would be unlikely to substantially improve retail investors’ ability to take well-informed investment decisions as it would not address marketing communications.

From an efficiency perspective, the outlined costs seem reasonable and proportionate to the expected results for retail investors. As discussed above, costs related to targeted measures on PRIIPs would be very limited and mainly one-off in nature. Updating the PRIIPs key information documents to comply with the new rules would not require collection of further data by PRIIPs manufacturers. Some further one-off costs may arise due to use of layering, depending on the voluntary choice of the PRIIPs manufacturer. Ongoing costs would not be significantly impacted. The situation is expected to be essentially the same for the requirement to use EU templates for cost disclosures and an annual cost and performance statement under IDD and MiFID. MiFID firms and insurance undertakings would essentially have to upgrade existing disclosure documents, causing limited one-off costs. If the number of retail clients becoming the recipients of annual ex post statement on costs and performance is expected to increase, it is also expected that such delivery would be made via digital tools, limiting thus the costs for the firms.

Better visibility of the most important information in PRIIPs key information documents would contribute to the coherence of the overall retail investment strategy, by helping to counter information overload and make disclosures more useful for investors 107 . Allowing greater flexibility for layering of information and digital presentation would also be coherent with the approach taken for the PEPP KID. The proposed changes in PRIIPs are coherent and complementary with inclusion in ESAP. While ESAP will improve access to and digital use of information in PRIIPs key information documents (enabling digital use such as extracting the data on costs or performance and comparing them across a range of products), targeted changes proposed here would make this information more user-friendly for readers 108 . The addition of an ESG dashboard would be consistent with the aim of the Sustainable Finance Strategy to empower retail investors to access sustainable finance opportunities by making relevant information more accessible and visible in the KID and it would be developed using data points from existing sustainable finance disclosure frameworks, to promote maximum coherence. Similarly, setting up EU templates for costs disclosure and the introduction of the annual costs and performance statement under IDD and MiFID will further strengthen the coherence of the framework. The use of EU templates for disclosure on costs should favour more comparability on costs and increase market efficiencies. The annual statement would also be consistent with the Pension Benefit Statement provided for pension products under the IORP II Directive and the PEPP Regulation which pursue similar goals.

4.Affected groups of stakeholders

Industry: Manufacturers of financial products under PRIIPs would benefit from more flexible rules to present required information in a more attractive way. They would also be able to adapt PRIIPs key information documents to more modern digital formats and devices. This could present a more effective way to deliver this information, particularly to younger retail investors and those with sustainability preferences, thereby helping to attract them to these products. While this option would not directly impact marketing communications, more user-friendly PRIIPs key information documents might to a certain degree compete with them and slightly limit the possibilities for presenting misleading information 109 . The update of PRIIPs key information documents to reflect the changes would imply limited one-time costs for the manufacturers of PRIIPs, as detailed above.

From the perspective of investment firms or insurance undertakings, the cost and performance disclosures would constitute increased costs. As the new requirements on cost and performance disclosure build on already existing requirements, it is assumed that existing processes and ICT solutions would help to limit these costs.

Consumers: the proposed measures would make PRIIPs key information documents more engaging to read and would assist retail investors in finding important information about investment products, including on sustainability-related aspects. PRIIPs key information documents would also become more accessible to users looking for investment opportunities through smartphones or tablets. This is expected to benefit retail investors considering these products, especially younger investors, who tend to be more active users of smartphones. Indirectly, this could lead more retail investors towards more diversified and less costly products that suit their needs. The proposed measures under IDD and MiFID II would increase transparency on costs and performance and comparability for the benefit of retail clients. This would help retail clients take well-informed investment decisions. Transparency could also have a downward effect on costs charged for MiFID II and IDD products and services.

Supervisory authorities: The targeted changes to PRIIPs key information documents would have only a negligible impact on supervisors who would have to adapt their supervision to the new formats. The measures under MiFID II and IDD would help NCAs in their control processes. In particular, it would allow them to check on a bigger scale and based on EU standards the ex-ante costs communicated to retail clients and the costs effectively charged (as disclosed in the annual report). It would also allow them to get a better view on the effective value for money of financial instruments marketed to retail clients.

Stakeholder views: This policy option, in particular regarding the changes proposed to the PRIIPs key investment document, has broad support across different stakeholder groups. Stakeholders from the financial sector have notably called for providing greater flexibility for layering and digital features. At the same time, some PRIIPs manufacturers have complained about regulatory fatigue 110 as there has recently been a revision of the PRIIPs RTS, which entails significant changes to the content of the KID and entered into application on the 1 January 2023. Supervisors are also overall supportive of the initiative. Representatives of consumer associations and non-profit organisation support measures on digitalisation and sustainability, and greater transparency on costs.

As regards the introduction of the annual statement in relation to IBIPs, consumer associations and insurance intermediaries have expressed support 111 . There may be limited support from insurance undertakings and investment firms who may argue that this increases the provision of information to retail investors.

Option 3: Targeted changes to address informational deficiencies relating to marketing communications

1.Benefits

The measures under option 3 would ensure better protection of retail clients by ensuring: i) more transparency on the nature of the marketing communication made, directly or indirectly, by investment firms, also in relation to online marketing (e.g. through social media); ii) the benefit of reinforced firm’s procedures and policies on marketing communication and on management’s responsibility, facilitating legal actions in case of misleading marketing communication 112 and iii) the inclusion of key elements related to the financial products and investment services, in all marketing communications.

Addressing the risk of unbalanced presentation of information in marketing communications on financial products and financial services would improve the quality and transparency of information provided to retail clients via marketing communications, thus ensuring that such communications would be a reliable source of information for retail clients. The obligation for investment firms and insurance distributors to include vital information in a visible way in all their marketing communications would make it easier for investors to identify key characteristics of financial products or services at ‘a glance’ and would in particular ensure a balanced presentation of positive and negative elements of products or services. For retail investors, the understanding and comparability of products would be improved, which could to a certain extent mitigate the risk of purchasing products which are not appropriate for them.

By increasing the quality of information that distributors provide to investors, the measures under option 3 aim to enhance trust between providers and retail investors. Rather than providing more information as in option 2, this option would reduce the likelihood that customers’ cognitive biases are exploited. While it is commonly accepted that cognitive biases matter in investment decisions, no data is available to quantify the impact. The more limited scope under option 3 would imply more limited impacts than under option 2.

2.Costs

This option is not expected to generate significant ongoing costs, as MiFID II and IDD 113 already require that all information, including marketing communication, addressed by investment firms and insurance distributors to their clients/customers shall be fair, clear and not misleading. However, despite this existing obligation, the relevant key information can be diluted across various or lengthy marketing (and contractual documents) 114 or presented in an unbalanced way. Requiring investment firms and insurance distributors to include vital information, in a visible way, in their marketing communication would imply some incremental costs either to adjust existing marketing communication templates or to create new templates. These costs arise due to the measures aimed at the objective of achieving clear and unbiased information to clients, hence they relate to the substantive requirements of the proposal. Nevertheless, they are categorised as administrative costs for “one in, one out” purposes. 

3.Overall assessment: Effectiveness, efficiency and coherence:

This targeted measure would contribute to the SO1 by ensuring that marketing communications contain, in a balanced and visible way for the targeted group, the key information which could help retail investors in their decision-making process. It would be an effective measure as it would ensure consistency of the overall information provided to retail investors. It would be important that the vital information remains limited in its scope and properly calibrated 115 . Nevertheless, if applied alone, these measures would be unlikely to substantially improve retail investors’ ability to take well-informed investment decisions as it would not address disclosure documents.

In terms of efficiency, the costs for an enhanced obligation for the firms would not be significant (as discussed above) and could possibly be passed onto retail investors. That impact would, however, be justified in light of a reduction in the risks of investing in inappropriate investment products.

In terms of coherence, the obligation to include vital information in marketing communications would apply to all marketing communications used by distributors selling investment products and IBIPs in the EU. It would ensure harmonisation across the Union, strengthening the internal market and ensuring the same level of protection to all retail clients. As the level of digital marketing communication is increasing both domestically and across borders, coherence in the level of regulatory requirements is becoming even more important to ensure a level playing field in the domain of investor protection. This option would likely facilitate comparison between investment products and services and have a positive effect on competition between investments firms in the EU and cross-border investment transactions.

4.Affected groups of stakeholders

Industry: The requirement to have vital information in all marketing communications and the clarification as to the concept of marketing communication, enhanced with reinforced organisational and responsibility rules, would require additional oversight by investment firms and insurance distributors, leading to higher costs. However, higher costs could to a certain extent be mitigated as the measures would also be expected to provide further clarity on the regime and reduce grey areas, providing additional certainty to ensure proper compliance with the existing rules. This could lead to cost reductions for compliance and legal advice, especially for smaller firms, due to the additional clarity provided by the definition.

Retail investors: The measure would help ensure that digital marketing of financial products is clearly identified as such, and compliant with applicable provisions on investor protection, also as regards influencers and other alternative means of advertisement. This measure would also help address the risk of misleading or otherwise illegal digital marketing on active or potential retail investors and facilitate legal actions of retail clients as well as increase their protection. The measure does not entail costs for consumers.

Supervisors: The requirement for firms to have vital information, presented in all marketing communication would facilitate the control of those communications by the competent authorities, without triggering any material additional costs. Clarification as to the concept of marketing communications would allow for easier intervention and enforcement by NCAs. In particular, this measure would provide a basis upon which the enforcement in relation to novel marketing techniques such as influencer campaigns could be streamlined. No significant impact is expected on the resources of ESMA and EIOPA, as their involvement and roles under this option can be performed as part of their existing regulatory and supervisory work.

Summary of the preferred option

The table below summarises the assessment of effectiveness, efficiency and coherence discussed under each option. Option 2 and Option 3 are complementary and both present an improvement compared to the baseline at a reasonable cost. Hence both Option 2 and Option 3 are both part of the preferred option.

6.2 Inducements

Option 2: Maintain current system allowing payment of inducements, but improve/harmonize sector specific disclosures relating to inducements

1.Benefits 

The aim of increasing transparency would be to help retail investors to better understand how inducements work, increase comparability between products and incentivise them to assess alternatives. Conversely, this could incentivise distributors to offer products that are better suited to their retail clients’ needs and investment objectives. While this may improve market transparency about inducements and foster competition between market players, evidence from behavioural testing carried out in the Retail investment study, suggests, however, that many consumers do not understand the concept/impact of inducements so that disclosures on inducements do not directly influence their resulting choices (see below).

This option would also ensure better understanding by the NCAs and ESMA of the inducements paid 116 . As the additional disclosure requirements would be streamlined across MiFID and IDD, this would help create a level playing field across sectors (IDD/MiFID) and also have a positive effect on the coherence of the framework.

2.Costs 

Requiring greater transparency would generate further one-off administrative costs, which are expected to be limited. The additional transparency requirements would not significantly increase ongoing administrative costs which market parties already incur in relation to existing disclosure requirements on inducements.

3.Overall assessment: Effectiveness, efficiency and coherence:

Option 2 could raise awareness about conflicts of interest by increasing information to retail investors about the existence and consequences of inducements. However, this measure would not be effective in eliminating the root cause of conflicted advice resulting from the payment of inducements. In terms of efficiency, increased awareness might result in retail investors taking better informed decisions based on a clearer understanding of inducements paid and their impact, and as such contribute to the SO1, “Improve information provided to investors and their ability to take well-informed investment decisions”. This would require that retail investors receive the information, understand it and act upon it, while evidence from the Retail investment study suggests that many consumers may not understand the concept/impact of inducements. 117 In terms of coherence, this measure would ensure coherence between the existing legal framework (MiFID and IDD), but not between European and national rules, where divergent approaches to inducements would continue.

4.Affected groups of stakeholders

Option 2 would increase burdens for all providers and distributors (administrative costs), as well as for the NCAs/ESAs who would have to collect, quality check and analyse data, as well as supervise that the information is properly and coherently disclosed to retail clients. While this option would only have minimal effects to address the identified issues, it could possibly slightly increase costs for retail investors as compared to the status quo.

Stakeholder views: Two main diverging stakeholder positions can be identified. On the one hand, consumer organisations consider enhanced transparency of inducements to be insufficient to fully address the conflict of interest. In their view, retail clients are at an information disadvantage and will often not be able to understand the effects of inducements and act upon it to take informed, good investment decisions. On the other hand, as evidenced by the public consultation, the majority of financial service providers generally consider the current disclosure framework together with the existing rules curtailing the practice of inducements to be satisfactory 118 .

Option 3: A ban on inducements

1.Benefits 

Option 3 would eliminate the main source of conflict of interest in retail distribution and thus increase the value and quality of distribution services (in particular advice, but also non-advised services) and of the products offered and sold to retail investors. As an expected outcome, the ban would eliminate product bias (i.e. incentives by distributors to distribute products that yield the highest commissions) and positively contribute to the distribution of products that better target the retail investor needs and objectives 119 . As shown by the experiences in the Netherlands and in third countries like the UK, the offer and purchase of simpler cost-efficient investment products would likely significantly increase and the costs of investment would likely be significantly reduced 120 . In the Netherlands, the number of households investing in low-cost index funds more than doubled from 8% to 20% between 2016 and 2021 121 . Moreover, in the Netherlands, management fees for mutual funds fell on average by 40% after the introduction of the ban on inducements 122 . This would contribute to improved investment outcomes for retail investors. As higher costs of investment products reduce net return of investments 123 , a ban will contribute to improving net investment performance and help channel retail investments into cost-effective products that better meet retail investors’ investment needs and objectives (SO2 and SO3).

The ban is expected to improve market efficiency on the supply side by allowing providers and distributors to compete on the basis of the merits of their investment product offering rather than commissions. It would also foster innovation and likely enhance the development of digital and automated, cost-efficient distribution tools better targeted to customer needs 124 . A unified and simplified framework across sectors (MiFID and IDD) would also ensure a level playing field across and within the investment and insurance-based investment segments, as well as within the Union. Eliminating conflicts of interest would also enhance trust in financial markets and thus provide additional incentives for consumers not previously active in financial markets to invest 125 .

The expected benefits for consumers of an EU level ban can be examined by looking at the total value of inducements charged to investors on an annual basis. However, the calculation of the value of inducements is not the only component of benefits for retail investors, since the removal of conflicts of interest and product bias as explained above is also an important benefit. An accurate estimation of the total amount of inducements paid is difficult to establish, due to strong data limitations regarding the share of inducements in total product costs and the exact number of products in the market that carry inducements. Based on a series of assumptions 126 , an illustration can be provided for certain segments of the market (i.e. actively managed UCITS funds which are directly held by retail investors). The total annual costs of inducements at an EU level for these funds represented an estimated EUR 5.13 billion (in 2019), EUR 5.25 billion (in 2020) and EUR 6.1 billion (in 2021). If dynamic effects of the ban were considered (e.g. investors switching to lower costs products), the benefits of the ban on inducements would be even higher. For example, assuming that 5% of investments in the EU would shift to low-cost investment products (such as ETFs), this could generate further aggregated cost savings of EUR 0.5 billion (2019), EUR 0.6 billion (2020) and EUR 0.8 billion (2021) 127 . The above estimates of the value of inducements are limited to only one market segment and should therefore be seen as a significant underestimation.

As a consequence of a ban on inducements, retail investors would have to pay separately for investment services, including financial advice, as these costs would no longer be incorporated into the overall fees. The costs of such payments could not be quantified, but it is expected that they would be significantly lower than the cost of inducements currently being paid.

Finally, the partial ban variant of Option 3 would benefit those retail investors that wish to invest via execution-only services: those retail investors would avoid any charges arising from inducements; the partial ban would remove incentives to give more prominence to certain products in the product offering; and retail investors could be more confident that products purchased without advice would not include additional charges linked to the payment of inducements, thereby giving them access to products carrying lower costs.

Inducements amount to sizeable costs paid by retail investors in the EU, in the order of billions of Euros. If these cost savings were passed on to households, they could contribute to wealth creation for retail investors and be further re-invested into the economy. Academic research from the University of Regensburg (2023) 128 , compares the effect of commission bans on household wealth in a panel data analysis and shows that countries with a (partial) ban on commissions experience higher household wealth growth.

2.Costs 

Providers and distributors would incur one-off adjustment costs to transform their existing commission-based business models into fee-based models. As product manufacturers would no longer transfer back fees to distributors, the latter would have to adjust their charging models. Such adjustments would also include new contractual frameworks and adjustment of billing systems. These changes and their justification would need to be implemented and communicated by firms to clients. There would also be one-off adjustment costs for product manufacturers for the transitioning of asset holdings which incorporate inducements into inducement-free asset holdings (e.g.in the case of investment funds the migration into inducement-free share classes). After the initial set-up, we expect similar or lower ongoing compliance and supervision costs compared to the baseline scenario. This is because some of the costs would be offset 129 by the elimination of administrative costs for the application of the quality enhancement (MiFID)/non-detrimental effects (IDD) criteria under the baseline scenario. No significant impact is expected on the resources of ESMA and EIOPA.

It has not been possible to gather EU wide statistical evidence to quantify the one-off and possible ongoing costs for the industry. However, the previous reform experiences in the Netherlands and the UK can provide some illustration.

The Netherlands have carried a high-level estimation of the costs in 2012 and 2014 which pointed to total one-off adjustment costs in the range of EUR 3.72 million to 16.9 million 130 for intermediaries and EUR 130,000 to EUR 4.3 million for product manufacturers. No ongoing costs were envisaged, except for insurance providers which totalled EUR 3.4 million.

In the UK more detailed cost estimates were presented for the incremental compliance costs possibly faced by the industry (not only for the ban on inducements but for a broader set of measures). Those costs were also subject to an ex-post evaluation. The revised estimates pointed to one-off (aggregated) adjustment costs for intermediaries segments ranging between EUR 2.9 million and EUR 37.9 million, depending on the segment (asset managers distributions arms at the lower end against banks at the higher end), whereas aggregated ongoing adjustment costs ranged between EUR 5 million for conglomerates and EUR 32.7 million for financial advisors that are directly authorised. With respect to providers, aggregated one-off adjustment costs ranged between EUR 164.6 million (asset managers) and EUR 408.9 million (insurers), while aggregated ongoing adjustment costs could reach between EUR 5.1 million (conglomerates) to EUR 38.2 million. The total compliance costs across all segments were estimated at EUR 819.4 million (ongoing) and EUR 181.9 million (one-off); Annex 7.C provides more details on the estimates and assumptions 131 .

As mentioned above, the ban on inducements was introduced as part of a broader set of measures and prior to the introduction of MiFID II and IDD. These cost indications also relate to other measures introduced at the same time (e.g. a wide set of disclosure obligations which are already implemented across the EU) and could therefore not be attributed solely to the ban. This might also explain a significant portion of the ongoing costs, which does not appear to be directly linked to the ban on inducements. It should furthermore be noted that the cost estimates included assumptions relating to ICT costs that were reasonable in 2010, but which require adjustment in light of technological advancements and the emergence of third-party providers servicing the industry. The ex-post review of the set of measures published in 2014, pointed also to over-estimations and under-estimations in selected areas (see annex 7.C) 132 . In the UK, these costs were also presented against the backdrop of expected benefits, by the use of specific examples illustrating potential consumer detriment and were in the range of EUR 314 million annually.

With a view to quantifying the compliance costs in connection with the inducement ban, the cost estimates performed in the Netherlands and UK were extrapolated to the EU-26 (cf. Annex 7.C). These extrapolations are subject to a number of assumptions and caveats, which are presented in Annex 7.C. The results show orders of magnitude which range between EUR 58 million to EUR 69 million in terms of relevant compliance costs on the basis of the Dutch estimation (covering only investment firms and asset managers), whereas potential costs based on the UK’s estimates are substantially higher, ranging between EUR 14bn and EUR 15bn, as that analysis also covered the sale of insurance-based investment products. Both cost estimates refer to one-off costs, although these could be spread over any potential transitional period to avoid cliff effects and achieve gradual compliance.

The costs of the introduction of a partial ban would be expected to be lower than compared to the introduction of a full ban, as a partial ban would not impact all investment products and services. A partial ban may imply one-off costs for product manufacturers and distributors, including in relation to the creation of separate asset classes without inducements, the change of billing systems and communication to clients. The amount of these costs would depend on the degree to which firms currently manufacture and offer products with inducements through execution-only channels and the choices they would make for their business model and product offering after the introduction of a partial ban. These costs are in any case expected to be lower than compared to a full ban on inducements. As an illustration, and extrapolating on the basis of the UK figures, the one-off costs of EU stockbrokers’ firms 133  - potentially the segment most affected by a partial ban (which targets pure brokerage services) - would be estimated to be in the vicinity of EUR 48 million 134 . This amount can be considered an underestimation, as it does not take into account the one-off costs that could be incurred by other investment firms and insurance intermediaries.

These above estimates should not be seen as actual estimates of the possible cost impacts in the EU as a whole. Given the wide ranges, the series of assumptions and caveats and significant differences between them, they do not permit a reliable extrapolation to the EU. They can however illustrate an order of magnitude as to the possible adjustment costs incurred as a result of an inducement ban.

3.Overall assessment: Effectiveness, efficiency and coherence:

Option 3 would be effective in achieving the prescribed objectives by removing the major source of conflicts of interest of intermediaries. As advisors are no longer rewarded to “push” products that pay the highest commissions but, due to their cost structure, are often not aligned with the objectives of the client (product-bias), intermediaries would be able to focus on the clients’ needs and objectives in the product selection 135 . This would contribute to the availability of bias-free distribution services, including advice, resulting in an improved “product-client match” of products. A ban would also likely improve market efficiency by allowing providers to compete on the basis of the merits of the product offering 136 (as opposed to competition based on the amount of inducements that distributors receive). Adjustment to business models would be necessary and certain existing market structure trends might further be enhanced.

The clear-cut nature of a ban would be efficient compared to the baseline, according to which inducements are allowed when they enhance the quality of the service (under MiFID) or are non-detrimental to the quality of service (under IDD). As identified in the evaluation, the current requirements are not sufficiently efficient to deter against the negative consequences and are also costly to supervise and subject to diverging interpretation and application across the Union. Despite the expected one-off adjustment costs, the measure is expected to be efficient considering the expected benefits.

A ban of inducements across the different sectors would increase coherence by harmonising the requirements across the Union and strengthen the internal market by granting the same level of protection to all retail investors, irrespective of Member State, type of product or distribution model. Particularly in light of increasing digital distribution, and the corresponding boost to cross-border passported services, this coherence would ensure a level playing field in the Union. 

As in the case of a full ban on inducements, a partial ban relating to execution-only services would be effective, coherent and efficient in addressing the identified problems in this market segment. Such a measure would not however address the identified problems in the advice segment.

4.Affected groups of stakeholders:

Industry:

Option 3 would affect all financial institutions in the value chain that provides investment services to retail investors. The shift to a ban on inducements would mean that distributors would no longer be able to receive commissions from product manufacturers and as a consequence would have to move to a fee-based model. Accelerated by increasing digitalisation, the ban on inducements would imply changes to market structures and business/ distribution models, which may affect the cost and revenue base both for individual financial institutions and the industry in general. Besides changes in the cost structure, a ban on inducements may imply a loss of revenues, but may also create new opportunities for financial institutions. The exact impact would depend on existing business models, the choices that financial institutions would make in the transition to a new fee model and the duration of any transitional period.

The existing market structures vary across Member States and product segments. Both vertically and non-vertically integrated value chains co-exist (in the former, the supply chain is within the same corporate control).  Another prominent feature is ‘closed architecture’ models (i.e. where distributors favour investment products from manufacturers belonging to the same group or from favoured third parties) 137 . Irrespective of the corporate structure and business model, investment products are predominantly distributed on the basis of commissions.

An inducement ban is expected to reduce the market-wide interconnectedness and break close ties between investment product manufacturers and distributors that exist as a result of commission payments. By removing the financial incentives created by the payment of inducements, financial intermediaries and financial providers would be able to compete more easily on the merits of their investment product offering (as opposed to competing on the level of commissions) and to use an open architecture model (including through availability of independent advice).

In its technical advice, ESMA pointed to a risk that vertical integration between banks and asset managers might result from a ban on inducements, in particular in markets with bank-centric models, possibly resulting in the offer by such groups of only in-house products to end-clients. This risk has not however materialised in the Netherlands, where on the contrary, following the ban there was a shift towards open architecture models. The three largest credit institutions divested their asset management businesses and opened their distribution channels to third party asset managers, leading to an increased offer of third party and more cost-efficient products. Those asset managers that had been divested from credit institutions built up their own direct distribution to retail clients, thus competing with the credit institutions 138 . The availability of independent advice in the Netherlands is as high as 50% of the market 139 .

In order to enhance the effectiveness of the ban, Option 3 provides safeguards against intragroup inducement-like payments (in the form of cross-subsidies to distributing entities from other group entities), whereby vertically integrated distributors would be prevented from providing advice below cost and, consequently, their ability to favour inferior in-house or preferred third party investment products would be impacted 140 . The preferred options on value for money will also serve as a flanking measure in this regard, helping to ensure cost efficiency of investment products, also when offered through vertically integrated models.

Independently of the distribution structure or models chosen (vertically integrated or open architecture), the ban on inducements would incentivise increased competition on the merits between investment products. This is because Option 3 applies to all distributors who would need to adapt the attractiveness of their investment product offerings to compete with that of other distributors 141 .

Option 3 would also likely result in a change of the relative portion of the different types of investment service provided to retail investors. The main channels through which products reach retail clients are advice, portfolio management, or non-advised services (for certain IBIPs)/execution-only (for financial instruments). Overall, the provision of advised sales would be expected to decrease in favour of the provision of portfolio management services and non-advised/execution sales respectively, at least initially. In the Netherlands, for example, the split between clients using advice, portfolio management or execution-only in 2021 was 5% for advice (down from 21% in 2013) while (automated) portfolio management services increased to 33% (up from 20% in 2013). Execution-only services, including those with additional guidance 142 remained stable (62% versus around 60% in the preceding years) 143 . In the UK there was an increase of self-directed activities. Under Option 3 there may be lower demand for advice and some financial institutions may decide to scale down their advisory activities and/or focus on other services. Within the advice category, a shift towards independent advice is expected 144 . It would also be easier for independent advisors to compete with non-independent advisors 145 , as they would no longer need to explain why they charge a fee for their services directly to the retail when most market participants do not 146 .

As regards insurance intermediaries, a ban would be confined to the sale of IBIPs and would not apply in the case of other insurance products. It is likely that a portion of insurance intermediaries would specialise in IBIPs, terminate their intermediation activities or shift to non-life products, not covered by the ban on inducements 147 . 

The above developments will be facilitated as well as accelerated by technological developments and the ongoing trend of digitalisation of financial services. While the extent of physical sales versus digital sales of investment services varies significantly across the EU, distribution channels and consumer habits are shifting generally strongly towards digital sales 148 . As Option 3 would render costs and the value of products and services more visible (both to investors and distributors), it is expected that this option would further incentivize firms to enhance operational and other efficiencies, notably through digital solutions, especially for products directed towards low-income/low net-worth clients 149 . Robo-advice or other digital advice models currently represent only a very small share of total retail business, but this is increasing 150 . Traditional distribution channels already innovate and will likely have greater incentive to do so and use more automated or semi-automated solutions in their advice and other service offerings in order to target client needs, reduce costs and improve operational efficiency 151 . Given the technological advances and changing consumer habits, large scale market restructuring and changes of business models is likely to be easier today than compared to a decade ago when the ban was introduced in the Netherlands and third countries like the UK.

The impacts of a partial ban on inducements relating to execution-only services would be considerably more limited than for a full ban on inducements, since it would only target the part of the industry that manufactures and distributes products to retail investors through execution-only channels. The impact of a partial ban on inducements relating to non-advised sales would be even more limited for IBIPs, as advised sales are the predominant distribution channel in most Member States. This is partially due to regulatory requirements, since a significant number of Member States either do not allow execution-only sales or require compulsory advice for the sale of IBIPs; if those Member States maintain such requirements, a partial ban would have no impact on non-advised services relating to IBIPs in those markets.

Retail investors:

A ban on inducements would eliminate conflicts of interest and increase the value and quality of advice and other distribution services offered to retail investors. A ban could also be expected to result in the sale of lower cost and less complex products to retail investors (see section on benefits).

A ban on inducements would lead to more transparent pricing for retail investors, who would be charged directly for investment services (including advice). Under the commission-based model, the price of advice is embedded in the product and its cost is not visible to the client. The advice is nonetheless not “for free”, but the client pays indirectly for this service (which they may not realize). A fee-based model would provide retail investors with a salient reference point to consider the value of the services/products provided to them (i.e. the price). As under the commission-based model, no explicit service fees are charged to retail investors at the point of sale, however retail investors have a tendency to underestimate the cost of advice, which also severely undermines their ability to assess its actual value. Transparent fees would allow them to better consider the value of advice and make an active decision as to whether or not they wish to solicit it 152 or instead engage in self-directed investments 153 . While a number of investors would be willing to pay for bias-free advice, other retail investors may change to self-directed investing or decide to opt for portfolio management. Therefore, it cannot be excluded, at least initially, that advised sales of investment products would decrease in some markets 154 .

Some stakeholders (from the industry, but not the consumer side) have expressed concerns in the public consultation about a risk of the emergence of an advice gap as a consequence of the inducements ban. According to these stakeholders, some consumers might not be willing or able to pay for advice and thus not invest at all. Consumers investing only small amounts of money might not be able to find distributors willing to advise them. In addition, there could also be consumers who independently of their investment needs and ability would remain ‘unengaged’ and who could use a “nudge” in order to invest. According to this argument, intermediaries would cease to serve those (potential) retail investor segments, because they would be unable to recover their costs 155 . On the other hand, other stakeholders, in particular consumer organisations, argue that non-independent advice is currently mis-qualified as “advice”, whereas in practice it could better be described as a sale of a financial product. These stakeholders consider that given the dominance of the commission-based model across the Union, “there is already an advice gap”, which would be removed by a ban on inducements 156 .

The experience in the Netherlands shows that the levels of retail investment remained stable and even slightly increased since the introduction of a ban on inducements from 20% in 2013 to 23% in 2021 157 .  That suggests that any reduction in advice services would not result in an investment gap, but rather in retail investors accessing investment services via other channels (see above) 158 . It can also be expected that (as experienced in the Netherlands) different types of portfolio management services and various types of execution-only services could emerge 159 . Investment advice, portfolio management and execution only, in the form of guided execution-only concepts, have been broadly available in the Netherlands since the introduction of the ban 160 , with fees as low as 0.8% -1% and without minimum investment amounts 161 , meaning that a person investing 10,000 EUR is charged no more than 100 EUR for the service and products acquired 162 .

Unwillingness to seek/pay for advice may be due to reasons other than affordability 163 , e.g. lack of understanding of the value that advice can provide, lack of engagement and limited interest in investing altogether (“not for me”) or also lack of trust in the advice. It can also be the result of retail investors preferring to do their own research and take their own investment decisions 164 . Introducing a ban would therefore incentivize investment advisors to better communicate with and demonstrate to their clients the value of the advice.

It is clear that consumers can benefit from support and assistance in their investment journey, including through un-biased advice, which is currently not sufficiently available or not available at all in many Member States. Option 3 would address this problem. Furthermore, evidence from the Netherlands (as discussed above) does not suggest that a ban on inducements would lead to an investment gap or an advice gap 165 . 

Increased operational efficiencies made possible through technological developments and digitalisation are also expected to contribute to improving access to investment services, especially for the category of potentially ’unserved’ retail investors (with small investments amounts) but also for retail investors more generally. This goes hand in hand with improving access to advice also for small investment amounts through for example semi or fully automated solutions 166 . A recent AFM survey in the Netherlands has shown that the proportion of retail clients that use or consider engaging with robo-advisors/semi-automated portfolio management has risen from 25% in 2016 to 53% in 2018. Of those, 9% already used semi-automated portfolio management in 2018, compared to just 1% in 2016. Those services typically provide access to low-cost index funds 167 .

At the same time, other flanking measures are expected to facilitate access to cost efficient investment services and increase retail investor engagement. These flanking measures would help guide investors and reduce barriers to affordable advice. In particular, the following measures are envisaged: (i) improvements to the suitability and appropriateness assessments (Annex 8), as well as adjustments of the legal framework for investment services aimed at fostering the availability for retail clients of cost-efficient investment support, (ii) by facilitating access and exchange to client and other relevant data, the Commission’s initiative for an open finance framework 168 should allow for operational efficiencies and data sharing which should facilitate automated or semi-automated models and stimulate the uptake of affordable advice, in both hybrid and digital forms, and (iii) efforts to raise financial literacy levels should also contribute to stimulate retail investor engagement and increase their willingness and ability to invest (see Annex 5). These measures would benefit all retail investors, including the less wealthy or less engaged retail client segments.

Finally, the partial ban variant of Option 3 relating only to execution-only services would offer benefits to retail investors: those retail investors would no longer incur inducement charges for self-directed sales; the partial ban would remove incentives to give more prominence to certain products in the product offering; and retail investors could be more confident that products purchased without advice would not include additional charges linked to the payment of inducements, thereby giving them access to products carrying lower costs. But while a partial ban would address the consumer detriment resulting from the payment of inducements in the execution-only segment, it would not address the consumer detriment relating to advised services.

Stakeholder views: similar to Option 2, stakeholders’ views diverge, although two main positions can be identified. Consumer organisations are favourable to a ban, pointing out that this measure would be the most effective way to address the inherent conflict of interest in the current system. Introducing a ban would not create, but rather eliminate an advice gap that already exists, and thus decrease the cost of investment, enhance quality of services and improve investment outcomes and more generally restore investor confidence in financial markets. Other solutions would risk increasing the complexity of the legal requirements without effectively addressing the core conflict of interest problem. The majority of financial service providers on the other hand, as indicated in the public consultation, would oppose a ban, referring primarily to the risk of an advice gap due to retail investors’ unwillingness to pay for advice and the increased risk of bad investment outcomes should they engage in self-directed investments. They would prefer to address problems relating to the payment of inducements through increased transparency.

Summary - Choice of the preferred option

Option 3, the introduction of a Union-wide ban on inducements, is judged to be the most effective measure to reach the overall objectives of the retail investment strategy and in particular Specific Objectives 2 and 3. It would remove or significantly reduce conflicts of interest in the investment decision process uniformly across the Union, to the benefit of all retail investors. A ban would reduce an important source of consumer detriment. The expected long-term benefits for retail investors are in particular access to better performing, less costly and more relevant investment products.

The level of knowledge and extent of participation of retail investors in capital markets varies greatly across the Union, but a common feature in all Member States is that retail investors are at an information disadvantage compared to providers, in particular with respect to the value of the service and products provided to them. As a result of the conflicts of interest inherent in commission-based models, independently of the level of development of the retail markets and level of knowledge of investors at Member State level, inducements have had a detrimental effect on the quality of service provided to retail investors and ultimately on their investment outcomes.

While Member States already have the option to introduce an inducement ban or other intermediary solutions at national level, a common Union-wide ban, together with enhanced common investor protection standards, would ensure a level playing field between Member States and across distribution channels, thus improving the efficiency of the internal market, in line with General Objective 3. That would benefit all retail investors across the EU. The trend towards increasing digitalization will continue and further underlines the need to strengthen investor protection rules throughout the Union for all service providers.

A transitional period to introduce a ban on inducements would be necessary to ensure that distributors and manufacturers have time to adjust their business models from a commission-based to a fee-based model. Examples of the steps that need to be taken are adjustments to the current fee schedule and billing systems, informing clients of the new structures, creating new share classes without inducements in the case of investment funds and upgrading IT systems where necessary.

Option 2, enhanced transparency, will increase the information available to investors to make informed decisions but is expected to be less impactful on retail investors’ ability to assess the implications of the value of the services and products provided to them and, therefore, would be unlikely to act as a deterrent or mitigating factor to effectively address the consequences of conflicts of interest.

The variant to Option 3 (partial ban on inducements for execution-only services), would address the consumer detriment resulting from the payment of inducements in the execution-only segment, but would not address the consumer detriment relating to advised services. However, a partial ban could be a first step that left open the possibility of further expansion to a full ban and could be a means of ensuring a smooth and gradual transition into a new system that avoided shocks from sudden major changes both in terms of impacts and adjustment costs for the industry. The situation relating to the payment of inducements and the types of products purchased by retail investors could be closely monitored and, should the implemented measures be considered insufficient, a comprehensive ban that included advised services might then be considered.

6.3 Value for Money

Option 2: strengthened governance rules at the product manufacturing level

1.Benefits

Strengthening the rules on product governance would require manufacturers to pay greater attention to costs to ensure that their products offer value for money. Increased controls and pressure to always maintain the cost-effectiveness of products would enhance discipline among manufacturers. The mechanism introduced by this option would significantly enhance the enforcement of Value for Money, by shifting the burden of proof from NCAs to manufacturers; manufacturers would need to demonstrate that the costs of their products do not deviate excessively from the appropriate benchmarks, or else to justify any such deviations. That would help eliminate from the market those products that are likely to present investors with poor value for money, as well as contributing to ensuring retail investors benefit from more cost-effective products (SO3), including wider availability of lower cost and potentially less complex (hence easier to understand) products that would better match their needs. It would also help ensure that the cost of each product is better aligned to its quality, i.e. the relationship between return expectations and the level of risk, taking into consideration other product features that would reasonably be expected to bring value for investors.

In its 2021 Supervisory Statement, EIOPA clarified that, as part of the assessment of value for money risks in their products, “manufacturers should be able to present a structured pricing process in their POG reporting to competent authorities” 169 . ESMA also considers the control of the cost/fee structure of the fund at the authorisation stage as a positive development 170 , and has encouraged competent authorities to perform a timely assessment of funds’ cost and fee structures in order to address investor protection risks.

Furthermore, the establishment of benchmarks would stimulate competition among manufacturers and help increase the overall cost efficiency of retail investment products. Benchmarks would also facilitate the task of supervisory authorities and ensure more effective supervision.

The benefits for retail investors would depend on the effectiveness of the new measures. Scenarios are presented under option 3 (below) illustrating the impact on the net returns that households could expect to earn on investment funds and insurance-based investment products, using existing microeconomic benchmarks and macroeconomic variables. Since option 2 is limited to manufacturing benchmarks, this analysis requires additional assumptions, which are explained below. The higher returns that investors could earn would amount to slightly below EUR 15 billion per annum in a scenario where yields in Member States with below average returns have converged half ways to the EU average. 171  

2.Costs

Since well-run product manufacturers should already have in place functioning cost accounting systems, the costs of producing comparisons against benchmarks should not generate high administrative costs. Article 9 of the MiFID delegated directive 172 already contains a number of obligations on manufacturers in respect of determining the target market and ensuring product quality, including the need to undertake a scenario analysis to assess the risks of poor outcomes for clients. Article 22(4) of the UCITS level 2 Directive requires management companies to prevent undue costs being charged to the UCITS and its unitholders and for each Member State to draw up rules of conduct for management companies. Similar requirements are also present in Article 17(2) of the AIFMD level 2 Regulation, as well as in Articles 4 to 8 of the IDD delegated regulation on product oversight and governance 173 . EIOPA also issued on 30 November 2021 a Supervisory Statement 174 explaining that Article 25 of the IDD and the delegated regulation on product oversight and governance require manufacturers of IBIPs to assess whether their products offer value for money in line with needs, objectives and characteristics of their target market.

The value for money (“VfM”) assessment would therefore represent a refinement of existing rules but including specified criteria and reference to benchmarks. The main adjustment costs resulting from this process would concern adjustment of processes to incorporate VfM aspects, involving one-off changes to IT systems. As calculations can be automated, this option would also not be expected to generate significant additional ongoing adjustment costs. The adjustment cost of the assessment against VfM benchmarks would be limited as most of the data and IT infrastructure are already in place in order to comply with existing disclosure requirements e.g. under the PRIIPs framework and existing product governance rules.

However, reporting to supervisors will entail additional administrative costs. The magnitude of these administrative costs will depend to a significant extent on how VfM is ultimately implemented, and the degree of granularity required. It will also depend in part on possible synergies with the supervisory reporting introduced by the AIFMD review 175 . Estimates (but which do not take account of such synergies) point to possible one-off costs for supervisory reporting about €60 million (range €13 to €252) million and ongoing annual costs of €2.3-22.6 million. The reason for this wide range is due to the uncertainty related to the underlying assumptions. 176 ESMA and EIOPA would be expected to refine these cost figures as part of their mandate to develop VfM benchmarks. 

ESMA and EIOPA would be allowed sufficient time to develop the relevant benchmarks as part of their existing regulatory roles. Any additional burdens should also be seen against the background of cost savings that ESMA and EIOPA will achieve (e.g. as a result of more targeted supervision, the availability of more granular data for their cost and performance reports, more tools to identify problems in specific sectors and in relation to specific products, etc.). It can be expected that additional costs for NCAs to receive the relevant information from product manufacturers and pass it on to the ESAs would likely be very limited. Some NCAs may need to intensify supervisory efforts to police the more rigorous rules, and staff would need to acquire new skills via training.

3.Overall Assessment: Effectiveness, efficiency, and coherence

Option 2 (limited to the product manufacturing level) would be an effective means to improve the cost effectiveness of retail investment products. It would be achieved via relatively limited amendments to existing product governance rules which would not entail substantial additional costs for product manufacturers. The elaboration of benchmarks to facilitate comparison with market standards would facilitate their tasks but would require additional resources for ESMA and EIOPA.

It would be efficient, as the benchmarks developed and provided by the ESAs would give manufacturers an objective standard against which to measure their products in the product approval process and facilitate their task.

A common approach developed at EU level would contribute to the further integration of EU capital markets and thereby increase coherence.

4.Affected groups of stakeholders

Retail investors

Retail investors would benefit from a higher level of protection, in particular as a consequence of improvements at the product design stage that could eliminate poor value investment products from the market, ensure better alignment of costs of products to a measure of their quality (i.e. relation between return expectations and level of risk), as well as increased market efficiency due to the introduction of benchmarks that enabled easier comparisons against market standards.

Industry

Manufacturers would benefit from greater clarity as to what is expected under product governance rules (in the form of criteria and benchmarks) detailing how to assess whether their products are designed appropriately so as to meet the target market's needs and the supervisory expectations of their national authorities. They would need to adjust their processes and would no longer be able to put into the market products that offered poor value for money. That would prevent them from incorporating high fees into products if they could not be justified. Distributors would be limited to selling only cost-effective products, thereby enhancing the attractiveness of product offerings in the market. Some transitional costs would be borne by the industry, but these would be expected to be marginal. Firms that were profiting from excessive fees would see revenue streams reduced. This could lead to some consolidation in the asset management industry. Currently, there are many manufacturers of investment products with a low average fund size, in which implies further potential to achieve economies of scale and a more efficient provision of financial products. A reduction in investment opportunities for retail investors appears a very unlikely consequence of increased competitive pressure on the manufacturers of investment products. Clearer standards would make the task of supervision more effective and straightforward.

Supervisors

NCAs will benefit from greater clarity as to how the supervision of costs should be applied. The new VfM provisions will equip NCAs with a tool, based on access to sufficiently broad-ranging data on costs of products, which will enable them to make evidence-based assessments. The burden of proof will be transferred from NCAs onto manufacturers who will need to justify deviations in their costs from relevant benchmarks. Supervisors will collect data on costs from manufacturers to pass on, possibly in aggregated form, to ESMA or EIOPA.

Stakeholder views: consumer organisations have broadly welcomed the idea of a strengthened VfM approach and set out clear ideas on how that might be framed in the legislation. This included developing market benchmarks against which the VfM prospect of proposed products might be compared (as opposed to comparing only to the distributor’s portfolio). All consulted consumer organisations recommended that VfM should be extended to all product categories, with all products falling in scope. Doubts were nonetheless expressed by some consumer organisations that the impact of any measure would be dependent on the extent of enforcement. Industry representatives had more mixed reactions and were generally more sceptical about how a VfM approach might be framed and how it might be able to capture a notion of value across a broad range of very different products.

Option 3 – strengthened product governance rules for manufacturers and distributors

1.Benefits

Option 3, in addition to the benefits as described under Option 2, would also oblige distributors to focus more clearly on identifying the most cost-effective products for their clients. It would ensure that the distribution costs 177 borne by the retail client would also be taken into account in the VfM assessment, together with the product costs. Distribution costs are important for the VfM assessment, as they are among the main cost drivers for retail products. For example, EIOPA found that distribution fees were among the main cost drivers for the most expensive retail insurance products (unit-linked and hybrid products) 178 .

Distributors would be helped to assess VfM by the availability of benchmarks and criteria for the assessment, as well as being able to base their assessments on information provided to them by product manufacturers. The available benchmarks, which would include distribution costs, and the need to document how products approved for distribution performed against these benchmarks, would ensure an additional level of accountability on the part of distributors.

It is expected that this option, involving the application of VfM assessments by both product manufacturers and distributors, would reduce the risk of poor investment outcomes for retail investors.

The introduction of benchmarks would limit the pricing power of providers and force inferior providers to adjust, either by offering higher returns or exiting the market. This would lift average returns that retail investors can earn and reduce their likelihood of encountering frustrating investment experiences. The exit of inefficient providers is unlikely to cause a reduction in the supply of products and remaining competitors should be able to absorb additional demand, as production costs of financial products increase only marginally with the number of products offered and since cross-border providers might be keen to expand business to other Member States.

Convergence scenarios can indicate the likely magnitude of the welfare gains stemming from the introduction of Value for Money benchmarks. At the onset, it should be noted that the numbers are strongly dependent on the assumptions made. For the below scenario, it was assumed that the net return of investments in investment funds and insurance unit linked products converges to the EU average in all those Member States in which the return has been below this average. The assumption is that increased competition resulting from benchmarks would close a certain proportion of the difference between the yield observed in these Member States and the EU average. Since there is no precedent to determine the proportion, scenarios were calculated with assumptions ranging from 10% to 50%. A less conservative approach would be to assume that returns converge to best practices, i.e. highest in the EU.

ESMA’s and EIOPA’s cost and performance reports provide comparable information on the current return of these products. Both ESMA and EIOPA however caution on data gaps and methodological differences that should condition our assumptions. Since ESMA’s and EIOPA’s reports do not indicate the extent to which retail investors actually purchase these products, a second complimentary data source was used, namely information on households’ investment income from investment funds and insurance policies from the sectoral non-financial accounts. Using the latest observations for the returns and combining these assumed increases in returns to the EU average with the value of investment funds and life insurance products held by households in the EU Member States, allows us to design scenarios that quantify the welfare gains in monetary terms under different assumptions. The scenarios suggest that benefits could reach EUR 2.8-13.8 billion for investment funds, and between EUR 1.7 and 8.4 billion for insurance products per annum, once convergence is accomplished.

Given the more limited scope of option 2 compared to option 3, monetary benefits under option 2 would be a share of those under option 3 and would depend on the extent to which revenues from the sales of the investment products go to either the manufacturer of the product or the distributor. A survey of distribution costs in the funds sector undertaken by ESMA in 2020 documented sizeable heterogeneity in this share, varying from at least 50% and up to 80% 179 . EIOPA’s report points to a much lower share of distribution costs for insurance investment products, but the lack of transparency around distribution costs and in particular payments of inducements, make estimates extremely difficult. The majority of observations for unit-linked products ranged from 10 to 30%. 180 Assuming that the revenue sharing is proportional to the cost shares, a benchmarking of manufacturing could reach a maximum share of 50% of the benefits of option 3 for investment funds and about 90% of the benefits for insurance products. This would amount to monetary benefits of between EUR 1.4 and 6.9 billion for fund products and 1.5 to 7.6 billion for insurance products.

2.Costs

In addition to the costs for manufacturers, as outlined under option 2, there would also be costs for distributors. Article 10 of the MiFID delegated regulation already contains a number of obligations on distributors to ensure that the products and services that they recommend are compatible with the needs, characteristics and objectives of an identified target market. Article 25 IDD and the Delegated Regulation on product oversight and governance provides similar requirements for insurance distributors, who must establish and regularly review product distribution arrangements to ensure that the objectives, interests and characteristics of customers are duly taken into account. They must also feed information back to the manufacturer in case of problems. The VfM assessment would represent an additional element to the assessment that distributors already need to undertake. Beyond the adjustment costs, additional ongoing administrative costs would not be expected to be significant, as this process could take place at a central level (e.g. the compliance department), and as costs must already be disclosed to retail clients and are hence known by distributors. Distributors would benefit from the availability of information on product costs that they would receive from product manufacturers, and from the possibility to base their assessments on objective available benchmarks. Some additional administrative costs would, however, result from the additional reporting on their distribution costs (as outlined in option 2). The cost relating to additional reporting should not be significant, as relevant cost data should already be known and available to distributors in accordance with existing MiFID and IDD rules, where such data must be disclosed to retail investors.

Some NCAs may need to intensify supervisory efforts to police the more rigorous rules, and staff would need to acquire new skills via staff training. This option would not significantly increase the work for supervisors by comparison to option 2. It would allow supervisory action to focus more on distributors.

For the ESAs, additional resources may be required in particular to develop the methodology and monitor the market.

3.Overall Assessment: effectiveness, efficiency and coherence

Option 3 would be a more effective means to improve cost effectiveness of investment products because it addresses both the product manufacturing and distribution stages. In so doing, it would ensure that investment products offer value for money by design, as well as providing a full overview of the cost effectiveness of investment products sold to clients, combining the product costs with the costs of distribution.

Both options 2 and 3 would be equally efficient, in particular due to the objective standard provided in the form of benchmarks compiled by the ESAs, against which a value for money assessment can be made. The development of such benchmarks should be done in line with the principle of proportionality, to avoid disproportionate adjustment and administrative costs on smaller distributors.

Similar to option 2, a common approach developed at EU level would contribute to the further integration of capital markets. Given that the VfM rules would be introduced for retail products across the different sectors, both options would be coherent.

4.Affected groups of stakeholders

Retail investors

Retail investors would benefit from a higher level of protection, in particular as distributors would be obliged to factor in the VfM prospect of the distributed products (in clearer terms than under current rules). As a consequence, retail investors should no longer purchase products that offer poor value for money, and the obligation to compare products against benchmarks should improve market efficiency.

Industry

The implications for product manufacturers would be the same as described under option 2. Distributors would be limited to selling only cost-effective products, thereby enhancing the attractiveness of product offerings in the market. They would be required to undertake a VfM assessment in addition to the existing obligations under product governance rules. Some transitional costs would be borne by the industry, but these would be expected to be marginal. Firms that were profiting from excessive fees would see revenue streams reduced. Both manufacturers and distributors of investment products could be subject to more intense competitive pressure. This is likely to intensify the consolidation and adjustment pressure on distributors of financial products, complementing the competitive pressure from the growth of digital distribution channels. Given low entry barriers and technical progress, it seems very unlikely that the intensification of consolidation pressure could lead to a reduction in the supply of investment products to retail investors. Clearer standards would make the task of supervision, and also compliance, more effective and straightforward.

Supervisors

NCAs will benefit from greater clarity as to how the supervision of costs should be applied. The new VfM provisions will equip NCAs with a tool, based on access to sufficiently broad-ranging data on costs of products, which will enable them to make evidence-based assessments. The burden of proof will be transferred from NCAs onto manufacturers who will need to justify deviations in their costs from relevant benchmarks Supervisors will collect data on costs from manufacturers and distributors to pass on, possibly in aggregated form, to ESMA or EIOPA.

Stakeholder views: Consumer organisations stressed the importance of ensuring that intermediaries should be obliged to compare products with equivalent products offered in the market. They were favourable to the use of benchmarks, noting that a market-wide benchmark would ensure clarity with respect to product comparisons should be made. This would enhance the efficiency of the market. Most consulted industry organisations expressed scepticism with respect to the introduction of VfM duties for distributors, as they lacked the necessary data. They were in particular opposed to an assessment of VfM and disclosure to the client at the advice stage (i.e. the discarded sub-option 2), on account of the potential for more information to confuse clients and as the VfM test would be unsuited for direct communication to clients.

Summary - Choice of the preferred option

Option 2, strengthened product governance rules applied to only product manufacturers, would be an effective measure to tackle the problem of excessive cost and poor value for retail investors. While it would focus on the way products are designed at the outset and require manufacturers to make costs transparent and consider how each cost element can be considered justified and proportionate and provide value to the intended target market, this option would not address the way products were actually distributed to retail investors.

Option 3, which would include the improvements to the product approval process set out in option 2, and additionally require distributors, as part of their product governance duties, to make a similar assessment that included additional distribution costs, would help ensure that products are offered only to an appropriate client base. This would ensure that costs of distribution that are not known to the product manufacturer would also be included. As in the case of Option 2, the value for money assessments would require the development of clear criteria and benchmarks against which the notion of “value” can be measured and compared to market standards. The compilation of benchmarks would rely on access to data relating to various cost components that are included in investment products, which may necessitate additional data reporting from firms to supervisors, wherever possible on the basis of data that is already known by firms (e.g. due to existing disclosure obligations). The development of these benchmarks should avoid imposing disproportionate costs on smaller distributors.

The more comprehensive approach – which is more effective than Option 2 – that includes the costs of distribution, set out in option 3, is the preferred option.

7.Preferred Combination of options

The selection of certain options has been made with the aim of maximising the effectiveness in addressing the specific objective related to a problem, while limiting the costs and potential negative side-effects on other specific objectives.

The preferred combination of options is as follows:

The combination of preferred options was designed to address the two key identified problems (informational deficiencies and shortcomings in the manufacturing and distribution processes). Retail investors should benefit from improved disclosures, in the form of more targeted and engaging information aimed at facilitating decision-making, while being better protected against increasing exposure to misleading marketing. At the same time, they should be faced with a choice of products that offer them better value for money and advised in ways that help them achieve better investment outcomes due to the removal of conflicts of interest in the advice process. 

During the preparation of this initiative, various alternative combinations of options were considered. In particular, they assessed whether a package of measures that did not include an inducement ban, but rather increased transparency around the payment of inducements might be effective. Such an approach would have also included a stronger emphasis on disclosures (e.g. cost disclosures) as well as a stronger suitability test (e.g. including an obligation on distributors of retail investment products to draw up a personal investment plan with an asset allocation strategy), in addition to a Value for Money option with stricter obligations for distributors. They concluded, however, that as long as conflicts of interest remained in place due to the continued payment of inducements, such a package of measures was unlikely to be as effective in helping retail investors achieve optimal outcomes from their investments. Therefore it was decided that the preferred option should feature a full inducement ban to eliminate conflicts of interest, which was assessed to be the most effective way to address a fundamental shortcoming.

The “flanking measures” (see section 5.4 and corresponding annexes) help to address the identified problems. They are an intrinsic part of the overall package under the preferred option. The measures are valuable as stand-alone measures but also amplify the effect of the main measures via synergies, for example:

·Increasing the level of financial literacy empowers investors to deal with investment information, assess the value their investment brings to them and take sound investment decisions. By promoting efforts to enhance financial literacy, the proposed disclosure measures could also become more effective. The financial literacy measures also complement the proposed measures on digital marketing because more literate investors will be better at identifying bogus or poor-quality investment offers.

·The possibility for investors with appropriate knowledge, experience and ability to bear losses, to request the status of ‘professional investor’ as proposed in the measures on investor categorisation will allow these investors to obtain more suitable and cost-efficient investment portfolios that match their profile. In addition, they would receive more targeted information, which fits in the aim of making disclosures more relevant for retail investors.

·The measures on enhanced suitability and appropriateness assessments should improve the quality of advice given to retail investors, or when no advice is requested, the appropriateness assessment should provide a minimum protection. The enhanced appropriateness assessment would include stronger warnings to help clients avoid investments in highly complex and often costly products that are not compatible with their financial capacity and ability to bear losses. These measures would improve the advice given to investors, complementing the measures to tackle the conflicts of interest stemming from inducements. In addition, they contribute to an investment environment in which retail investors receive value for money. Measures aimed at raising the standards of professional qualifications across the EU should further support the efforts to improve the quality of investment advice and increase trust.

·The various measures aimed at enhancing supervisory enforcement should result in a better general retail investment environment and strengthen and complement different specific measures across the preferred option package. For example, following the proposed measures NCAs would be in a better position to more rapidly address aggressive marketing practices and impose risk warnings. In addition, strengthening rules to facilitate complaints handling in cross-border situations, for instance, should have a positive effect on the level of trust in the retail investment market.

Economic impacts and impacts on SMEs

The package of measures assessed in this impact assessment would enhance retail investor protection by addressing two types of market failure that determine the relationship between retail investors and providers of financial services: asymmetric information and misaligned incentives (conflicts of interests). Enhancing disclosures and oversight on marketing communications would reduce the information costs for retail investors that accrue in the selection of financial distributors and products. Value for Money benchmarks would have a comparable effect on investors’ search and information costs, as they would provide them with information on the value of investment products. Investors’ capacity to benefit from better disclosure and benchmarks would be improved by flanking measures that increase their financial literacy and access to high-quality advice, consistent with findings in economic literature that the better informed and educated the retail investors are, the better they are able to make use of advice and benefit in terms of improved investment performance 181 .

The relationship between disclosure and retail investors’ financial literacy is self-reinforcing. An improvement in financial literacy enables investors to make better use of the information at their disposal to avoid financial products that do not correspond to their needs. Without useful information, however, better financial education may on the contrary actually reduce the confidence of investors to make good choices, with the likely outcome of even higher search and information costs. Moreover, since financial literacy goes hand-in-hand with some investors becoming overconfident 182 , efforts to increase financial education without at the same time introducing measures to improve the information set available to investors may even lead to an increase in cases of mis-selling. The obligation to subject retail investors to a suitability assessment or appropriateness test addresses detrimental effects from investors becoming over-confident, implying that they would take on more importance the better informed and more literate retail investors become.

Measures to reduce information asymmetry would not be sufficient to address the issue of conflicting interests. Academics have suggested that under specific theoretical conditions, more information could even make the investor worse off 183 . Measures that address conflicts of interest reduce the importance of trust and hence the need for both investors and distributors to develop longer-term relationships. For example, a ban on inducements paid by manufacturers to distributors could reduce reluctance of investors to interact with other distributors or to take advice from them. Value for Money benchmarks improve investors’ access to more cost efficient products. Standards on the qualification of financial advisors would allow investors to change their advisor more frequently. Likewise, trust in supervisory enforcement would provide reassurance to investors that they receive a certain level of advice and guidance independent from which specific supplier they approach.

Overall, better investor protection would translate into fewer incidents of mis-selling and lead to a better selection of investment products. It would also enhance transparency around costs and the ESG profile of investment products and improve investors’ ability to understand and select between investment products and ultimately could improve the level of trust of retail investors. Multiple measures included in the preferred options would improve market efficiency and innovation and jointly contribute to a shift towards cheaper and higher quality investment products.

Higher trust levels might also entice population groups that had not yet invested to consider reallocating their financial wealth from both traditional savings instruments or possibly more speculative and risky instruments towards well-regulated retail investment products. As a consequence, both new and existing investors would stand to benefit from higher long-term returns on their financial assets, better protection against inflation and better diversification of their wealth. This also would help consumers accumulate capital for their retirement and other life objectives.

The combination of adjustment costs, reduced pricing power and overall more competitive pressure are likely to lead to a decline in financial firms’ profit margins. The combined effect of the policy measures would be a redistribution of rents from financial corporations to the household sector and, for those cases where financial firms need to upgrade IT and skills of staff to comply with new requirements, the transformation of their profits into higher revenues for suppliers of IT and professional training. The comparison of the estimates of benefits and costs, however, suggest that the net welfare increase will be positive.

The above numbers assume that the investor base remains constant. Firms would benefit from improved consumer protection if more symmetric distribution of information and better alignment of incentives succeeds in fostering investor participation. The available data suggests that about a quarter of EU households hold investment products, while three quarters do not. When asked in the Eurobarometer survey, why they did not invest, about half responded that they had not the financial means to do so. The remaining respondents, that would extrapolate to around 70 million households, quoted other obstacles, to which the policy measures analysed in this impact assessment would contribute to overcoming. Measures to improve information disclosure and financial literacy could foster participation of households that had not invested because they considered investment as too complex. Aligning incentives through the inducement ban, improving the quality of advice and stronger supervisory enforcement could contribute to unblocking reluctance of some households that are concerned about risks. Availability of more cost-efficient products resulting from the new Value for Money approach could convince some of those households that refrained from investment because of too low returns. Although the results from the Eurobarometer allow an estimation of how large the untapped retail investor base might be, the impact of the measures on higher investor participation cannot be quantified with any confidence, since there are no good coefficients available from academic research to do so.

Notes: * EB := Eurobarometer No 509, 2022; multiple replies were possible. ** 26% of the respondents to the Eurobarometer survey indicated they were holding investment products. The basis for these questions were those that replied they did not hold an investment product. These shares were multiplied with 145 million households in the EU that did not hold investment products (out of 195 million total households in the EU).

Any resulting increase in retail investor participation would also have implications for the size of the EU capital market investor base: the resulting scale effects would contribute to making EU capital markets more efficient and attractive. Over time, corporations might benefit from more access to funding, reduced bank dependency and new restructuring opportunities allowing them to adapt and grow.

The problems this impact assessment aims to address occur throughout the market. The proposed measures, such as the ban on inducement, therefore apply to all relevant active intermediaries, independent of their size. The measures are expected to contribute to a more equitable and competitive market in which those intermediaries, whether large or small, that offer (provide) good value-for-money products (services) can thrive.

The transition from a commission-based to a fee-based model will lead to temporary costs for large firms and SMEs but might also accelerate the development of alternative (digital) sale channels or services and encourage innovation. The regulatory changes might support the ongoing trend towards increased consolidation, depending on industry dynamics 186 .Regarding the partial ban, the same considerations would likely apply to those financial service providers which are SMEs. 

Adjustment costs and other compliance costs are unavoidable, for instance to implement the Value-for-Money framework but are considered to be reasonable in view of the benefits they will bring to all stakeholders 187 . Fulfilment of any additional reporting requirements 188 should, to the extent feasible, be based on already reported or existing data and collected in the most efficient way in order to minimize administrative burden for large and small entities, which will be explicitly requested in the Level 2 empowerments of the ESAs.

The overall benefits and costs of this initiative are summarised in Annex 3.

External impacts

This initiative would not have any significant external impacts. Financial advisors and other entities from third countries may only be affected if they do business in the EU and in the same way as their EU-domiciled competitors.

Impact on environmental and social factors, fundamental rights and on Sustainable Development Goals (SDGs)

This initiative can be expected to have a slightly positive impact on environmental and social factors, notably though the inclusion of an ESG dashboard in PRIIPs key information documents. This would contribute to greater visibility of environmental and social characteristics of investment products for retail investors and could lead indirectly to greater use of such information when comparing and selecting products. This measure would hence contribute positively to multiple SDGs and notably to SDG no. 13.

The overall initiative would indirectly contribute to SDG no. 8 – decent work and economic growth – as it would shift incentives to favour the interests of retail investors and over time contribute to their greater participation in capital markets. Further detail on the impact on SDGs is included in Annex 3. No potential negative impacts on fundamental rights have been identified.

Digital by default

This initiative can be expected to have slightly positive impacts on the promotion of digitalisation, notably due to the adaptation of PRIIPs key information documents to the digital age by enabling greater use of layering and adapting PRIIPs key information documents to be compatible with digital formats and use on smartphones. Furthermore, the ban on inducements could contribute to a digital shift in investment product distribution, such as greater use of robo-advice or direct digital marketing.

Application of the ‘one in, one out’ approach and REFIT (simplification and improved efficiency)

With regard to cost savings and simplification, the main objective of the strategy is to enhance retail investor protection; any assessment of its potential for simplification and burden reduction should not compromise this objective. Moreover, the Evaluation (Annex 11) has concluded that overall, the retail investment protection framework does not generate high costs (especially administrative costs) for the financial industry. Hence the potential for simplification is limited, even as the team has assessed it and identified the following measures 189 expected to reduce administrative costs (“OUTs” under “one in, one out”):

1.Savings on existing requirements on inducements 190 due to the ban on inducements: A ban on inducements is considered a more straight-forward solution to the issue of misaligned incentives and would replace existing administrative obligations. This benefit cannot be feasibly quantified 191 .

2.Investor categorisation: regulatory alleviations for investors with appropriate knowledge, experience, and ability to bear losses. This implies a reduction in information overload for these investors and that product manufacturers and distributors would be able to save resources dedicated to assessing clients’ needs and objectives and providing information to them. However, as this benefit is expected to affect only a small number of retail investors and to be rather small, it has not been quantified in line with the principle of proportionality of analysis.

Additional administrative costs (“INs” under “one in, one out” offsetting) would arise from supervisory reporting against the Value for Money benchmarks and changes to the disclosure rules. The new obligations under Value for Money would imply one-off costs estimated approximately at €13-252 million and ongoing costs estimated approximately at €2.3-22.6 million per year (both figures present an EU-wide total). Important practical specifications will be decided at a later stage, as part of a mandate to the ESAs, so these estimates are subject to considerable uncertainty. Further assessment of these costs would be made at Level 2 by the ESAs, with the intention of obtaining more precise estimates. Only some of the administrative costs 192 related to the changes to disclosure rules and marketing communications could be quantified: these amount to €19-67.5 million in one-off costs. None of the other measures are expected to lead to significant administrative cost implications. Other costs resulting from this initiative are discussed in Annex 3. Since not all “INs” and “OUTs” could be quantified, it is not possible to establish which element would be larger.

8.How will actual impacts be monitored and evaluated?

The Commission will monitor how the implementation of the proposals on disclosure and marketing communications, inducements, and value for money achieve the objectives set out in this impact assessment. An evaluation of these initiatives will be carried out five years after its entry into application. Any externally commissioned study conducted in preparation of the evaluation may also assess structural changes in the retail investment and distribution market, including in relation to advice and its availability and the proportion of advised to non-advised services, and their relation with the above measures. Relevant developments related to the implementation of the flanking measures described in annex will be also considered 193 .

1.For published 2014-16 data, see ESMA report on Trends, Risk and Vulnerabilities, 2017, No. 1

2.ESMA and EIOPA will be tasked to develop guidelines and ensure regular monitoring of how marketing practices are changing, including any new emerging risks.

Annex 1: Procedural information

Lead DG, Decide Planning/CWP references

Directorate-General for Financial Stability, Financial Services and Capital Markets Union.

[PLAN/2021/12340]

Organisation and timing

The initiative is included in the Commission Work Programme 2023. Furthermore, the initiative covers topics from action points 7 and 8 from the Capital Markets Union action plan 194 .

Consultations Inter-service Steering Group (ISSG)

The first ISSG meeting took place on 27 January 2022 with the attendance of the representatives from the following Directorates-General (DGs) of the European Commission: Justice and Consumers; Competition; Employment, Social Affairs and Inclusion; Taxation and Customs Union; Trade; Internal Market, Industry, Entrepreneurship and SMEs; Regional and Urban Policy; Migration and Home Affairs; Communication Networks, Content and Technology; Structural Reform Support; Environment; Research and Innovation; Legal Service; Secretariat General; Financial Stability, Financial Services and Capital Markets Union. There were two more ISSG meetings that took place on 29 September 2022 and 5 December 2022.

DG FISMA has considered the comments made by DGs in the final version of the impact assessment. In particular, DG FISMA has provided more clarity about the seriousness of some of the problems, as well as the links between the flanking measures and the main areas addressed in the impact assessment. FISMA has also strengthened the coherence of this impact assessment with the evaluation. The analysis of impacts and the preferred option takes account of the views and input of different DGs.

Consultation of the RSB

The Impact Assessment report was examined by the Regulatory Scrutiny Board (RSB) on 18 January 2023. The Board gave a positive opinion with reservations on 20 January 2023 following which the Commission made changes in order to address the Board’s requests for improvements in the final version of the Impact Assessment.

The main areas in which this Impact Assessment was reinforced following the Board's recommendations on the impact assessment are summarised as follows:

The Board’s request to reinforce the presentation of the scope and scale of the problem and its effects on the retail financial services ecosystem was addressed by strengthening the text, notably by inserting additional data and better explanation of the underlying economic context. Consumer detriment has been more clearly explained and the description of issues has been improved, highlighting the need to take urgent action. The presentation of the key policy choices and flanking measures have been improved by elaborating and clarifying further on certain elements of the policy options

In addition, the quantitative analysis impact has been improved and the revised text now includes additional estimates of the impact of the inducement ban and value for money, explaining where necessary the limitations around quantifying disclosure measures. The discussion of qualitative economic effects has been deepened and enlarged, including a clearer explanation of the connection to relevant economic concepts and interlinkages with the flanking measures. An SME test has been added as additional annex.

The overall presentation of the costs and benefits of the preferred option package has been improved. With respect to the flanking measures, the text now includes an additional table setting out the flanking measures that are assessed in annex, the problem that they seek to address and the objective they seek to achieve. The text also includes an explanation as to how the flanking measures interact with preferred options and produce synergy effects. A paragraph has been added outlining an alternative combination of options that was considered, which did not include an inducement ban, as well as an explanation as to why this was not taken up.

Consultation with the Member States

The Commission held separate meetings with the Government Expert Group on Retail Financial Services (GEGRFS) on 3 December 2020, 7 December 2021 and 2 March 2023.

The views expressed by several Member States at the first meeting included the need for the Retail Investment Strategy to be coordinated with other workstreams, in particular on sustainable finance, the need for comparability and simplification of information as well as greater cost-efficiency for retail investors. Investor protection, also in relation to inducements, and the importance of disclosures were also stressed.

At the second meeting, following a presentation of the preliminary results of the public consultation on the retail investment strategy, Member States expressed their support for work on financial literacy, for further efforts to streamline and improve disclosure requirements as well as the need to update the existing framework to accommodate digitalisation challenges. Some Member States also noted their support for a ban on inducements, while other expressed concerns that access to advice should remain available. Member States also highlighted the need to address aggressive marketing techniques, and the need to facilitate access to suitable and simple investment products.

During the third GEGRFS meeting, the Retail investment Strategy was discussed, with a specific focus on inducements. In the beginning, representatives from both the consumer and financial sector were invited and provided opposing views on the issue of inducements, including a potential ban on inducements. In addition, the Dutch AFM presented its experience with the ban on inducements underlining that the results were positive and the ban achieved its goal of eliminating conflicts of interest. The Commission services gave an overview of the Retail investment Strategy. During the following discussion, a large majority of Member States expressed concerns about a potential impact of a ban on retail investment distribution systems.

Evidence, sources and quality 

In line with the general principles in the Better Regulation guidelines on the need for evidence-based impact assessments, this impact assessment is based on the following data and information sources:

1.European Commission, Directorate-General for Financial Stability, Financial Services and Capital Markets Union, Uličná, D., Vincze, M., Mosoreanu, M., et al., Disclosure, inducements, and suitability rules for retail investors study: final report, Publications Office of the European Union, 2022,  https://data.europa.eu/doi/10.2874/647061 (Retail investment study)

2.European Commission, Directorate-General for Financial Stability, Financial Services and Capital Markets Union, Distribution systems of retail investment products across the European Union: final report, Publications Office, 2018, https://data.europa.eu/doi/10.2874/037900 (Study on distribution systems of retail investment products)

3.A new Vision for Europe’s capital markets Final Report of the High Level Forum on the Capital Markets Union, June 2020

4.Final Report on the European Commission mandate on certain aspects relating to retail investor protection, 29 April 2022, ESMA (ESMA advice on retail investor protection)

5.Final Report on technical advice to the European Commission regarding certain aspects relating to retail investor protection, 29 April 2022, EIOPA (EIOPA advice on retail investor protection)

6.Call for Advice on PRIIPs: ESA advice on the review of the PRIIPs Regulation, 29 April 2022, Joint Committee of the European Supervisory Authorities (Advice of the ESA joint committee on PRIIPs)

7.Joint European Supervisory Authority response to the European Commission’s February 2021 Call for Advice on digital finance and related issues, 31 January 2022

8.IOSCO, ‘Report on retail distribution and digitalisation’ Final report, The Board of the International Organization of Securities Commissions, October 2022 (IOSCO report on retail distribution and digitalisation)

9.Publicly available studies, reports, position papers and other relevant documents drawn up by private and public stakeholders.

Annex 2: Stakeholder consultation (Synopsis report)

With a view of developing an EU strategy for retail investors, the Commission launched a number of consultations with the objective of gathering stakeholders’ views on how the existing framework for retail investments can be improved. The Commission also collected feedback in the course of dedicated workshops and interviews with stakeholders, including industry representatives and consumer organisations. To obtain additional evidence, moreover, the ESAs were requested to provide the Commission with their technical advice on the retail investment framework and the PRIIPs Regulation. This Annex provides an overview of the feedback received to support this impact assessment.

1.Public stakeholder consultation: A Retail Investment Strategy For Europe

A public consultation on ‘A Retail Investment Strategy For Europe’ was launched by DG FISMA on 11 May 2021 to gather views from a broad group of stakeholders on various aspects pertaining to retail investments, namely: pre-contractual disclosures (including PRIIPs), quality of advice in light of current inducement practices, the suitability and appropriateness assessments, financial literacy, complexity of products, the impact of increased digitalisation of financial services, investor categorisation, redress, the ESAs’ product intervention powers and sustainable investing. The consultation ran until 3 August 2021, and all contributions were submitted online.

Overview of respondents

A total of 186 respondents participated in the public consultation. The types of organisations most widely represented were business associations (59) and company/business organisations (51), together representing 59% of all respondents. Respondents also included 4 consumer organizations (2%), 9 NGOs (5%), 17 public authorities (9%), 4 trade unions (2%), 35 citizens (33 from the EU and 2 from outside the EU, in total 19%) and 8 classified as ‘others’ (4%).

The largest group of respondents selected investment management as the sector of belonging (37%, 58 respondents), followed by banking (35%, 54 respondents), a third group which indicated “other” (32%, 49 respondents) and insurance (14%, 26 respondents). Among industry stakeholders only, the most represented sectors were investment management (43 or 39%) and banking (also 43 or 39%), followed by insurance (18 or 16%), market infrastructure (12 or 11%) and a group which only indicated “other” (21 or 20%) 195 .

The majority of respondents came from the EU (91%, 170 respondents), from 22 Member States. The highest number of respondents came from Germany (21%, 39 respondents), followed by France (14.5%, 27 respondents) and Belgium (12.9%, 24 respondents). There were also 16 responses (9%) from five countries outside the EU (Australia, Norway, Switzerland, UK and the United States).

Respondents’ feedback to the general questions 196

A majority of respondents (86 out of 150, or 57%, including company/business representatives of the banking, insurance and investment management industries, as well as a 9 public authorities) were of the view that the current framework sufficiently empowered and protected retail investors. 53 or 35% were largely of the opposing view, mainly consumer organisations and NGOs, as well as 4 national authorities and some company/business representatives of investment management, banking and market infrastructure. Similarly, when asked whether existing limitations stemming from retail investor protection rules were justified, a majority (89 out of 149, or 60%, mainly company/business representatives of banking, insurance, investment management and market infrastructure), were of the view that limitations were unjustified, whereas 45 or 30%, (including consumer organisations, NGOs, some banking and insurance representatives as well as most public authorities) defended the limitations.

A substantial majority of respondents (95 out of 154, or 62%, mainly company/business representatives of all participating sectors as well as 7 public authorities) were aware of investment products that retail investors were prevented from buying due to constraints imposed by EU regulation, with a number of respondents (predominantly business and company representatives) highlighting areas where they considered that the regulatory framework (or indeed lack of regulation) unnecessarily prevented retail investor participation. Respondents also expressed concerns about perception of risk and lack of understanding as some of the most important factors that might discourage or prevent retail investment. A majority of respondents (78 out of 142, or 55%), including 9 public authorities and company/business representatives of investment management, banking and insurance, agreed that investment products were sufficiently available to retail investors, although that sentiment was less strongly felt among 29 or 37% of respondents, namely consumer organisations, NGOs, and citizens. Business and company respondents from all sectors represented in the consultation also strongly supported the view that products were competitively priced and offered alongside a sufficient range of competitive products, in contrast to the views of consumer organisations, citizens, NGOs and 4 public authorities, who disagreed.

Almost half of respondents (66 out of 138, or 48%) 197 agreed that products were adapted to modern digital channels whereas a lower share of respondents (48 out of 137, or 35%) 198 agreed that retail investment products are sufficiently adapted to ESG criteria. The most supported area where the vast majority of respondents (104 out of 134, or 78%), namely consumer organisations, company/business representatives from all the sectors participating in the consultation and most (i.e. 9) public authorities, saw scope for improvement was financial literacy. Consumer organisations also expressed a preference for improvements to disclosure requirements and inducements as well as quality of advice and complexity of products, whereas public authorities gave the highest priority to inducements and quality of advice, disclosure requirements as well as financial literacy.

Financial literacy

There was overwhelming consensus that increased financial literacy would be beneficial to retail investors. A majority of respondents affirmed the positive impact of financial literacy, noting that financial literacy helped improve investors’ understanding of financial products, helped investors create realistic expectations, and helped them to align investments with their objectives (137 out of 144 or 95%, 139 out of 143 or 97%, and 138 out of 144 or 96% respectively). Stakeholders’ views were also sought as to which further measures aimed at increasing financial literacy might be pursued at EU level. Respondents offered various suggestions and comments, including on cooperation and funding, the coordinating role of the Commission, the importance of financial literacy at school, as well as the effectiveness of financial education and the need for other measures in addition to financial literacy to protect retail investors.

Digital innovation

A strong majority of respondents (80%) was positive towards an open finance approach, noting several benefits, while however acknowledging the risks. Machine-readability of key documents was identified as an essential new tool that might be enabled through innovation, as was the development of a digital identity, the latter of which would be very beneficial for consumers and reduce duplicative compliance costs. Artificial intelligence and analytical tools would help service providers create better, customised products. Half of respondents (68 out of 137, 50%) considered that diverging rules on marketing and advertising of investment products constituted an obstacle for retail investments when accessing products in other EU markets, while a smaller group of respondents (33, 24%) disagreed and 36 respondents (26%) expressed no opinion. All stakeholder groups were generally in agreement, with the exception of public authorities whose opinions were split evenly. Views were split as to whether there might be a need for stricter enforcement of rules on online advertising to protect against possible mis-selling of retail investment products, with a slightly larger group of respondents (61 out of 142, 43%), composed of most business organisations and associations, suggesting that the current enforcement regime was adequate, as opposed to those (59, 42%), which included most consumer organisations and public authorities, who saw the need for stricter enforcement.

A majority of respondents (83 out of 144, 58%), which included a majority from all stakeholder groups, expressed support for further coordination and harmonisation of national rules on online advertising and marketing of investment products, whereas 41 respondents (28%) disagreed, and 20 respondents (14%) expressed no opinion. A strong majority (105 out of 137, 77%) agreed that social media platforms played an (either somewhat or very) important role in influencing retail investor behaviour, whereas an even larger majority (111 out of 136, 82%) considered that social media platforms may be used as a vehicle by some users to help disseminate investment related information, and this may pose (either somewhat or very) significant risks for retail investment. Consumer organisations and public authorities were almost unanimous in this view, while a majority of business associations and organisations agreed. In this regard, 50% (amounting to 69 out of 138 respondents) highlighted the need to introduce rules at EU level, whereas 39 respondents (28%) disagreed, and 31 respondents (22%) voiced no opinion. Consumer organisations, NGOs and public authorities were overwhelmingly in favour of this introduction, with a smaller majority of business organisations and associations agreeing. Most respondents (82 out of 141, 58%), mainly from public authorities, business organisations and associations, indicated that adequate protection for online purchases existed, commenting that where problems did occur, they were an enforcement issue. Others (39, 28%), including all consumer organisations, noted that some digital-specific risks existed and should be addressed via EU rules. Finally, views were split as to how important it was that lower risk and non-complex products appeared first on listings when products were offered online, with 39% (52 respondents out of 132), mainly business organisations and associations, indicating it was rather not important or not important at all and 30% (40 respondents), including a majority of public authorities, indicating that it was somewhat or very important. One consumer organisation also suggested that risky and complex products should not be included in the rankings at all.

Disclosure requirements

Industry representatives generally agreed that pre-contractual disclosure documentation for retail investments enabled adequate understanding of the key product features in cases where no KID was provided (52 out of 131, or 40%, mainly representatives of banking, investment management and insurance). On the other hand, 35 respondents (or 27%) including 5 NGOs and all consumer organisations considered these inadequate and public authorities saw room for improvement. A group of respondents was of the view that the information provided to retail investors in the PRIIPs KID was sufficiently understandable (33 out of 128, or 26%) and reliable (37 out of 124, 30%), to help them take investment decisions, including half of consumer organisations, business representatives from all sectors participating in the consultation and a minority of public authorities and NGOs. This was opposed to those who indicated that the information was not sufficiently understandable (42, 33%) or reliable (33, 27%), including consumer organisations, less than half of public authorities as well as representatives of all the sectors participating in the consultation. Moreover, respondents were generally of the view that information about the type, objectives, functioning, risk-profile, and the summary risk indicator of the product was understandable and reliable, while the information about product performance was less so. In addition, the majority (77 out of 134, or 57%) of respondents 199 agreed that pre-contractual disclosure should enable as far as possible a clear comparison between different investment products (e.g. insurance versus investment funds), unlike the 37 (28%) who disagreed 200 .

Almost half of respondents (55 out of 126, 44%), including consumer organisations and NGOs as well as 5 public authorities and company/business representatives of banking, investment management and insurance, considered that the amount of information provided in the PRIIPs KID was adequate, however views on information about product performance were split 201 . On the PRIIPs KID, a group of 33 out of 119, or 28% of respondents 202  considered that information on sustainability-aspects of the product was insufficient. A similar share of respondents, 31 or 26% 203 , considered that it was adequate, while only 11 or 9% thought it was excessive. The remaining 37% did not express an opinion. In general, respondents expressed support for the current maximum length of the PRIIPs KID or a similar pre-contractual disclosure document, although some consumer organisations and public authorities expressed a preference for shorter KIDs, and the investment management industry expressed a preference for more flexibility. There seemed to be general agreement that the PRIIPs KID was overloaded with information.

On the Insurance Information Document, 31 respondents out of 91, or 34%, including one consumer association, 6 public authorities, most NGOs and representatives of the banking, insurance and investment management sectors, said that the amount of information provided was adequate. Only 5 (5%) stated that it was insufficient, while 9 (10%) deemed it excessive, in both cases mainly business representatives of the insurance sector. The remaining 51% did not provide an answer.

Regarding the way product cost information is calculated and presented in the EU disclosure rules (e.g. PRIIPs, MiFID, IDD, PEPP, etc.), a vast majority (80 out of 128, or 63%, 204 ) saw overlaps, inconsistencies, redundancies, or gaps. Only a minority (11 or 9%) stated that they were not aware of such characteristics in EU disclosure rules. With respect to how performance information is presented, similarly, a majority of 71 out of 122, or 58% 205 , stated that they were aware of overlaps, inconsistencies, redundancies, or gaps. Only a minority (13 or 11%) answered that they were not. Moreover, respondents expressed different views on how disclosure requirements for more complex products and those for simpler products should differ, including inter alia that more information on complex products would not necessarily facilitate understanding, that the definition of “complex” products was not always appropriate, that it would be important to ensure that consumers saw less risky and complex products first, or that such products should not be offered without advice (some respondents suggested adding one extra page to the KID for complex products. Many respondents, particularly from the industry, considered that there was no need for additional information).

A vast majority of respondents (108 out of 133, 83% 206 ) were in favour of the use of electronic format by default, with (free) paper versions available upon request. A similarly strong majority (110 out of 134, 82% 207 ) noted the importance of information documents translated into the official language of the place of distribution. When disclosing information through digital means, a large group of respondents found that it was important that key information was displayed in ways which highlighted the prominence, was appropriately labelled, and that relevant hyperlinks used to provide access to supplementary information. Clear rules to prescribe presentation formats and the adaptation of formats for different kinds of devices were also recommended.

The PRIIPs regulation

Slightly more than a third of respondents who answered (49 out of 129, or 38%) agreed that the PRIIPs KID improved the level of understanding that retail investors have of retail investment products, as opposed to slightly fewer who disagreed (43, 33%), while the remaining respondents (38, 29%) voiced no opinion. While the views of consumer organisations were split, representatives of investment advisors, insurance, and other sectors such as banks generally answered affirmatively. Half of the public authorities who answered (7 out of 14) found that the PRIIPs Regulation had not met this objective, pointing to the PRIIPs KID’s complexity, its tendency to be overloaded with information, and the fact that cost and performance indicators may in some cases be misleading.

Views were split (49 out of 128, or 38%, disagreed whereas 46, or 36%, agreed and 33, or 26% voiced no opinion) on whether the PRIIPs Regulation improved the ability of retail investors to compare different retail investment products, both within and among different product types. Among those who agreed were 1 consumer organisation, 5 public authorities and representatives mainly from the banking sector, as well as the insurance and the investment management ones. Those who disagreed included 2 consumer organisations, 6 public authorities, as well as NGOs and company/business representatives of mainly investment management, in addition to some from banking and insurance. A fourth of respondents (34 out of 127, 27%), mainly from business associations and companies (overwhelming from the banking and insurance sectors) and a minority of public authorities (2), indicated that the PRIIPs Regulation had reduced the frequency of mis-selling of retail investment products and the number of complaints, while a smaller group (22, 17%) counting 4 public authorities and NGOs disagreed. The remaining 60% expressed no preference. Moreover, 39 respondents out of 128 (30%) 208 agreed that the PRIIPs Regulation had enabled retail investors to correctly identify and choose the investment products that are suitable for them, based on their MiFID and IDD defined individual sustainability preferences, financial situation, investment objectives and needs, and risk tolerance. However, 50 respondents, or 39%, disagreed 209 . Finally, 39, or 30%, voiced no opinion. Almost half of respondents (77 out of 128, or 47%) 210 considered that retail investors were easily able to find and access PRIIPs KIDs, while another group (26, or 20%) 211 were of the opposing view and another 26 respondents (20%) had no opinion. No views were expressed on the rules on access to the PEPP KID.

A majority of respondents (67 out of 119, 56%) preferred requiring that the PRIIPs KIDs and PEPP KIDs be made available in a dedicated section on manufacturer and distributor websites 212 . This was followed by requiring that the KIDs be uploaded onto a searchable EU-wide database (47, 39%, 213 ), whereas a larger portion of respondents (60 or 50%, 214 ) disagreed. The uploading onto national databases was supported by 40, or 34% 215 .

A significant majority of respondents (86 out of 123, or 70%, made up of 1 consumer organisation, 9 public authorities, NGOs, and company/business representatives of all the sectors participating to the consultation) saw merits in simplifying the current PRIIPs KIDs. A group of respondents (49 out of 117, 36%, i.e. 9 public authorities, NGOs and company/business representatives of banking, insurance and investment management) noted the existence of inconsistencies or discrepancies in the actual implementation of the PRIIPs Regulation. Only 16 or 14% disagreed. A small number (18 out of 111, 14%, among which investment management companies, insurance and banking associations, as well as 2 public authorities) noted inconsistencies in the supervision of PRIIPs KIDs. Limited answers were provided, with strong variability between them, on the costs of manufacturing and updating a PRIIPs KID, a PEPP KID and an IPID. A larger group of respondents (44 out of 107, 41% 216 ) answered that distributors and/or manufacturers of Multiple Option Products should not be required to provide retail investors with a single tailor-made KID reflecting the preferred underlying portfolio of each investor, as opposed to those who agreed to this (21, 19%, 217 ), while 41 (38%) held no opinion. A majority of consumer associations and public authorities which responded expressed their support for a single tailor-made KID.

On the question whether pension products should be included under the scope of the PRIIPs Regulation, a majority of respondents, mainly from business associations and companies from the banking, insurance, and investment management sectors, were generally of the opinion that pension products should remain outside the scope, whereas a minority, mainly NGOs, consumer organisations, and citizens, expressed their support. Half of respondents (70 out of 118, 59%), in particular on the industry side, were generally opposed to allowing access to past versions of PRIIPs KIDs, pointing to the risk of displaying outdated KID versions and subsequent misinterpretation. A smaller group of respondents (20, 17%) were in favour and 28 respondents (24%) voiced no opinion. A strong majority (90 out of 122, or 74%) finally indicated that the review and updating of the PRIIPs KID should not occur more regularly than what was the case at the time of consultation.

Suitability and appropriateness assessment

The results of the consultation on the suitability and appropriateness assessments show a significant contrast in the perception of the effectiveness of those tools between the respondents from industry and those from consumer organisations.

The overall majority of respondents (81 out of 126, 64%), mainly from business organisations (73%), public authorities (54%) and business associations (90%) considered that the suitability assessment served retail investor needs and was effective in ensuring that they are not offered unsuitable products. Public authorities were equally divided about the usefulness of the appropriateness test to serve retail investor needs. Consumer organisations and NGOs, on the other hand, overwhelmingly disagreed on the efficiency of those tools. Nearly 100% of this group and 52% (65) of all respondents identified problems with the suitability assessment and made suggestions for improvement regarding inter alia the interplay between the product governance rules and suitability or appropriateness testing, focussing on the overall understanding of investments or portfolio composition, making the rules less burdensome and more useful for the investor and clarifying the interaction between knowledge and experience criteria.

Most stakeholders, constituting majorities from business organisations, business associations, and public authorities, found that the rules on suitability assessments (64 out of 121, 53%) and appropriateness tests (74 out of 122, 61%) were sufficiently adapted to the increasing use of online platforms or brokers when providing advice. However, consumer organisations and NGOs largely disagreed or expressed no opinion.

A strong majority (91 out of 123, 74%) of stakeholders from the business groups, considered that providing a warning about the fact that a product was inappropriate was sufficient protection for retail investors, however some respondents of that group expressed concerns, inter alia that warnings might not be enough for complex instruments. On the same topic, nearly all of the consumer associations considered that providing a warning was not sufficient in terms of investor protection. The majority of stakeholders (83 out of 123, 67%) from all respondent groups except for consumer organisations (of which only a third agreed) agreed that in case of the execution of orders or transmission and reception of orders of certain non-complex products, at the initiative of the client, no appropriateness test should be required.

39 respondents out of 98, or 40%, mainly business organisations and associations agreed or strongly agreed that the demands and needs test in its current form was effective in avoiding mis-selling of insurance products and in ensuring that products distributed correspond to the individual situation of the customer, opposed to the 9 (9%) that disagreed or strongly disagreed. However, 51% of respondents, in large part consumer organisations and public authorities, indicated that they had no opinion (38) or viewed this as neutral (12). A few (21 out of 100, or 21%), being a minority from all stakeholder groups except consumer organisations, all of which voiced no opinion, identified problems with the demands and needs test, in particular its application in combination with the suitability assessment in the case of insurance-based investment products, including inter alia the failure to consider the consumer's global assets and/or possible over-insurance or double insurance and the fact that the line between suitability test and demands and needs test appeared to be blurred. Around one third (33 out of 96, 34%) disagreed that more detailed rules were needed in EU law regarding the demands and needs test to make sure that it was applied consistently throughout the internal market, opposed to roughly 19% of respondents (18) who answered affirmatively. The majority of respondents (45, 47%), representing a majority from all different stakeholder groups, voiced no opinion. About one fourth of respondents (34 out of 93, or 37%), mainly public authorities, business associations and organisations, considered that the demands and needs test was sufficiently adapted to the online distribution of insurance products, while a much smaller group (8, 9%) considered that this was not the case and an absolute majority of 51 respondents (55%) voiced no opinion. Respondents were also divided (out of 94, 20 affirmative (21%) versus 25 negative (27%)) on whether procedural improvements or additional rules or guidance were needed to ensure the correct and efficient application of the test in cases of online distribution. The disagreeing stakeholders were public authorities, business associations and organisations, whereas all consumer organisations voiced no opinion.

Reviewing the framework for investor categorisation

A strong majority (92 out of 137, or 67%), composed of a majority of public authorities, business organisations and associations, found that adjusting the existing definition of professional investors on request would be the most appropriate approach for ensuring more appropriate client categorisation. The introduction of an additional (semi-professional) client category received less support (51 out of 139, or 37%) while the “no changes”/other measures option gathered support from an even smaller group (26 out of 130, 20%). All stakeholder groups presented a majority which disagreed with the latter two options, except consumer organisations which were evenly split among “yes”, “no” and “no opinion”. A significant majority of respondents indicated that changes were necessary to the criteria measuring frequency of transactions over the last four quarters (95 out of 124, 77%, overwhelmingly from public authorities, business associations and organisations, with consumer organisations disagreeing), the existing wealth criteria (78 out of 126, 62%, mainly from business associations) and the criterion measuring a clients’ experience (88 out of 124, or 71%, constituting a majority from all stakeholder groups). A majority of respondents (70 out of 123, or 57%), mainly from business associations and organisations, also supported the introduction of an additional fourth criterion. Regarding the criteria for companies to be classified as professional investors, around half 49% (56 out of 114) expressed support, with most business associations in agreement. 34 respondents (30%), including most business organisations, expressed no view, whereas 26 respondents (23%), including a majority of consumer organisations and public authorities, did not support the introduction.

Inducements and quality of advice

When considering options aimed at protecting retail investors against receiving biased advice due to potential conflict of interests, including regulating inducements, the option of ensuring transparency had the largest support (100 out of 126, or 79%), particularly from business and company representatives of insurance, banking and investment management, as well as 10 public authorities, half of the consumer organisations, and NGOs. Only 9 respondents or 7%, including 1 consumer organisation, considered that transparency had little impact on consumer behaviour.

A strong majority of 93 respondents out of 128, or 73%, in particular business/company representatives from banking, insurance and investment management as well as 8 public authorities, considered that a ban on all forms of inducements for all retail investment products would not be effective. Among those opposing the ban, in total 20 or 17%, concerns were expressed inter alia about the quality and availability of advice. Consumer organisations, NGOs and 2 public authorities were instead in favour of a ban. Among those in favour of banning inducements, it was suggested that it might result in distributors proposing a wider range of cost-efficient and less complex products, pointing also to the experience of the Netherlands. A majority of respondents, (74 out of 119, 62%) in particular business/company representatives of banking, insurance and investment management, as well as 6 public authorities and 1 consumer organisation, found that the current rules on advice and inducements under MiFID ensured sufficient protection against poor advice due to potential conflicts of interest. Among the 23 (19%) who disagreed were 3 out of 4 consumer organisations, 2 public authorities and NGOs, while the remaining 19% voiced no opinion. The views in relation to IDD and payments of inducements to providers of online platforms/comparison websites were less clear-cut. 31 respondents out of 114 (or 27%) including 3 out of 4 consumer organisations, NGOs, 3 public authorities and representatives of mainly investment management, found that the current rules did not ensure sufficient protection. The 49 respondents, or 43% that instead agreed that IDD provided sufficient protection included 4 public authorities and a majority of representatives from the insurance and banking sectors. The remaining 30% expressed no preference.

Out of the 114 who answered, a majority of 67 (or 59%) of respondents (among which 3 consumer organisations, 9 public authorities, NGOs and representatives of all sectors participating in the consultation) were in favour of aligning rules related to the payment of inducements across MiFID and IDD. Views were instead split (depending on the sector to which the respondent belonged) over whether IDD should be aligned to MiFID rules or vice versa. 53 respondents out of 128 (41%), mainly businesses and company representatives from the banking and investment management services as well as 4 public authorities, disagreed that legislative changes were needed to address conflicts of interest, receipt of inducements and/or best execution issues surrounding the compensation of brokers based on payment for order flows from third parties. A third (44, 34%) however took the opposite view and supported the need for legislative change. They included 3 out of 4 consumer organisations, 8 public authorities, NGOs as well as representatives of mainly market infrastructure, in addition to banking, investment management and insurance. The remaining 25% voiced no opinion.

On the question whether there was merit in developing a voluntary pan-EU label for financial advisors to promote high-level common standards across the EU, the views were split (52 out of 121, or 43% of respondents disagreeing, 47, or 39% of respondents seeing such merit, and the remaining 22, or 18% sharing no opinion) 218 . A majority of respondents (61 out of 115, or 53%) were of the view that robo-advisors were regulated in a manner sufficient to protect retail investors 219 . A majority of respondents (66 out of 114, or 58%) also suggested that the use of robo-advisors remained limited in the EU because customers placed greater trust in human advice 220 .

Addressing the complexity of products

Among the 130 that replied to the question, half (65 out of 130, or 50%), namely consumer organisations and NGOs, 6 public authorities and company/business representatives of banking, investment management and market infrastructure, considered that further measures should be taken at EU level to facilitate access of retail investors to simpler investment products, whereas a smaller group (52, 40%, including 4 public authorities and company/business representatives of insurance, banking and investment management) disagreed. A majority of respondents were opposed to: (a) measures to reinforce or adapt execution of orders rules to better suit digital and online purchases of complex products; (b) measures to make the rules which prohibit excess complexity of products that are sold to retail investors more explicit; (c) the development of a new label for simple products; (d) developing further rules to define and regulate simple products; and (e) measures to tighten the rules restricting the sale of very complex products to certain categories of investors. Consumer organisations and NGOs however generally supported such measures.

Redress

A significant majority of respondents (78 out of 113, or 69%), including all consumer organisations, NGOs, and public authorities, as well as a majority of business associations and organisations, considered that it was somewhat or very important that retail investors had access to rapid and effective redress, in particular when investing in another Member State. Most respondents (71 out of 106, 67%) were of the view that the MiFID II requirement for investment firms to publish the details of their complaint handling process was sufficient to ensure efficient and timely treatment of client complaints. This view was particularly strong among public authorities, business and company representatives, while the views of consumer organisations and NGOs were split. Most respondents (54 out of 101, or 53%), mainly business associations and organisations, were of the view that retail investors knew where to turn in case they needed to obtain redress through an out-of-court procedure, a view which was not shared by some consumer organisations, NGOs, and public authorities. Most respondents (65 out of 106, 61%), constituting a majority in all stakeholder groups except consumer organisations and NGOs (which expressed split views), also considered existing out-of-court procedures to be (somewhat or very) effective at addressing consumer complaints related to retail investments/insurance-based investments. Consumer organisations, NGOs and some other public authorities expressed however a number of concerns. A group of 46 respondents out of 50 (92%) were of the view that further efforts might be needed to improve redress in a cross-border context, while 27 respondents (54%) shared the view that such efforts might be needed domestically. 221 A sizable minority (49 out of 106, or 46%), mostly consisting of business associations and organisations, considered consumer redress in retail investment products somewhat or very accessible to vulnerable consumers, while a smaller group of 18 respondents (17%) found that redress was rather not accessible or not accessible at all. 53 (50%) respondents, including majorities of consumer organisations and public authorities, were either neutral or voiced no opinion.

Product intervention powers

A majority of respondents (71 out of 112, or 63%) indicated that the ESAs and/or NCAs were making sufficiently effective use of their existing product intervention powers. A clear split was noted between a first group comprising business/company representatives and public authorities, and a second group made of consumer organisations and NGOs. The latter group was indeed of the view that ESAs/NCAs did not use their powers effectively. Views were also split as to whether further convergence of NCA powers was needed (42 out of 108, or 39% in favour, 36, or 33% against, and 30, or 28% voicing no opinion). On the side of industry, a larger group of respondents saw no need for further convergence, whereas a majority of public authorities, consumer organisations, and NGOs saw a need for further convergence. A majority of respondents (60 out of 113, or 53%) saw no need to reinforce the product intervention powers of the ESAs. This view was particularly shared by business associations and company/business organisations, with many respondents arguing that the current framework and powers of the ESAs were sufficient. However, a majority of public authorities considered that it would be necessary to reinforce the product intervention powers of the ESAs, with some arguing that ESA product intervention powers should be made permanent, or alternatively, have a longer duration. All consumer organisations (3, 100%) and most NGOs (4, 80%) were by a large majority in favour of strengthening the product intervention powers of the ESAs.

Sustainable investing

A majority of respondents (44 out of 61, or 72%), constituting the majority of business organisations and associations, indicated that financial returns were the most important element when investing, followed by investments that contributed positively to the environment and society (10 out of 41, or 24%). The views of NGOs and consumer organisations on the ranking of priorities were split, with a majority indicating that the financial returns were least important. The majority of respondents (56 out of 104, or 54%), including all consumer organisations and a majority of NGOs and public authorities, considered that the fear of greenwashing represents a very or somewhat important factor preventing more sustainable investment. The ‘lack of an EU label on sustainability related information’ (50 out of 106, 47%) and ‘poor financial advice on sustainable investment opportunities’ (48 out of 105, or 46%) were also considered important factors by almost half of the respondents, including a majority of consumer organisations and NGOs. Half of respondents (59 out of 118, or 50%) considered that ‘detailed guidance for financial advisers would be useful to ensure simple, adequate and sufficiently granular implementation of sustainable investment measures’, while 42 respondents (36%), mainly business organisations and associations, did not. There was clear support from NGOs, consumer organisations, public authorities, and trade unions for the former view, also shared by most citizens. A slightly larger group (45 out of 115, 39%), composed largely of business associations and organisations, considered that the reinforcement of the current research framework to ensure systematic consideration of ESG was not needed, as opposed to a smaller group (40, 35%), composed largely of consumer organisations, NGOs and public authorities, which considered it needed.

Other issues    

A number of comments were provided on topics not covered by other chapters of the consultation with relevance to retail investments, including how new regulation may impact the level of direct participation of retail investors in capital markets, the interconnectedness of retail investment and wholesale financial markets, the increase of market data fees, improving participation of retail investors in corporate governance matters, various issues pertaining to sustainability, different aspects pertaining to supervision, in particular when services are provided on a cross-border basis, the prevention of fraud, and taxation issues.

1.2. Targeted consultation on options to enhance the suitability and appropriateness assessments

On 21 February 2022, the Commission also launched a targeted public consultation on options to enhance the suitability and appropriateness assessments. The deadline to respond was 21 March 2022. The consultation looked into the feasibility of a new retail investor-centric approach to the MiFID II and IDD suitability and appropriateness tests. Such a proposal was the result of stakeholders’ suggestions received in the Retail Investment Strategy public consultation, regarding the possibility to simplify, improve, automate, and standardise the way investor profiles are currently assessed. Views were sought on the options proposed to enhance the client assessment regime and introduce a personalized asset allocation strategy.

Overview of respondents

In total, 69 respondents participated to this public consultation. The largest group of respondents came from business associations (36) and company/business organisations (21), representing together 82% of all respondents. There were also 5 public authorities (7%), 1 consumer organisation (1%), 1 NGO, 1 trade union, 1 EU citizen, and 2 others (3%) who participated in the consultation.

The largest group of respondents came from the investment services industry (27, 39%), followed by the insurance industry (16 or 23%). Other respondents came from a group which indicated “other” (16 or 23%), as well as from investment management (15, 22%), new technologies (6, 9%), pension provision (4, 6%), market infrastructure operation (1, 1%) and social entrepreneurship (1, 1%). The respondents that indicated “not applicable” were only 2 (4%) 222 .

The majority of respondents came from the EU (98%, 68 respondents) with one response from outside of the EU (United States, 1%). The highest number of respondents came from Belgium (22%, 15 respondents), followed by Italy (16%, 11 respondents) and France (13%, 9 respondents). The above-average response rate from Belgium can be explained by the high number of EU-level organizations and associations who have their seat in Brussels.

An enhanced client assessment regime – General

Most business associations and organisations considered that the current suitability and appropriateness assessments were well-designed and did not require extensive changes, and hence were not in favour of the idea of a standardised retail investor assessment regime. Conversely, only 2 citizens, 1 NGO, and 1 trade union were in favour, while public authorities were split. A principal argument of the supporters of a more client-centric approach was that putting consumer interests at the centre would spur more competition. Some expressed support for a “retail investor passport” which would allow a retail client to easily switch between or using multiple brokers/financial intermediaries. Others noted that a standardised retail investor regime could reduce discretion and improve harmonisation in the application of the assessment process, further enabling national and EU authorities to better supervise these processes and allowing individual investors to enforce their rights, thus making it easier to compare recommendations and assess “value for money”. On the NCAs side, several considered that an in-depth analysis of the weakness of the current regimes was needed as a preliminary step, fearing that a new regime could bring additional burdens on investment firms and a probable deathblow to existing execution-only distribution channels.

The majority of respondents were of the opinion that a Personal Investment Plan (“PIP”) would not bring specific benefits to retail investors and financial intermediaries, while a sizeable minority expressed a positive view about the PIP’s potential. Most respondents believed that there would be certain drawbacks associated with the introduction of the PIP regime, noting large implementation costs requiring significant and complex adaptations of IT systems and internal processes. A few respondents noted that standardisation of the onboarding process would reduce the margin for financial intermediaries to use innovative machine learning tools and behavioural finance methods. They added that such standardisation would also reduce or remove the incentive for intermediaries to compete on improving the quality of assessment processes. Other respondents stressed that standardisation of the PIP questionnaires at EU level would be difficult given the variance in cultures and environments, as well as the bespoke nature of insurance-based investment products and execution-only services. On the latter, several respondents found that requesting a suitability assessment in such cases would contradict the basic approach of financial instrument transactions without advice. The different nature of investment services was viewed as justifying a different degree of information to be obtained and assessed, and consequently the appropriateness and suitability assessments should remain separate. Regarding the concept of a personal asset allocation strategy (“PAAS”) in general, several respondents noted that investment intermediaries would be biased towards products that are part of their offering. Therefore, these strategies may differ significantly from one intermediary to another. Some respondents highlighted that clients tend to be secretive about their financial situation, and that for a successful implementation of the asset allocation approach, it would have to be guaranteed that the client is transparent about their overall financial situation.

Amongst the minority who supported the more client-centric approach, one business association indicated that this initiative could be game-changing when coupled with the upcoming Open Finance strategy, as it would spur more competition, put consumers’ wishes and interests at the centre, let clients be the true owners of their personal data, encourage digitalisation, and ultimately empower retail investors to participate more in capital markets. A majority of the respondents were however not in favour of giving retail investors the ability to transfer the results of their assessment together with their PAAS to brokers/financial intermediaries of their choosing, on the grounds of them being confidential know-how. Other respondents stated that the transferability and use of the assessment and PAAS may create liability risks for the intermediary providing the investment advice. Several respondents believed that this portability could lead to standardisation and ultimately to an impoverishment of the product ranges, as well as a general deterioration of the quality of the investment advice given to the client. Regarding the key components of a standardised PIP and the main investment objectives and constraints to be addressed by a PIP, respondents expressed some support to the different suggested elements, with little support for the elements related to the duties and responsibility of the adviser drawing up the PIP and for all rules and guidelines surrounding the drawing-up and review of the PIP. Elements regarding the client’s tax situation got little support as well. Respondents mostly agreed that the tax situation must not be included in any appropriate / suitability assessment, because of its complexity.

On the electronic storage and accessibility of the suitability assessment and the asset allocation strategy by all financial intermediaries (subject to client consent), opinions were evenly split. Many respondents expressed concerns about the risk of data profiling and client manipulation as well as liability and remuneration issues. Few responses were recorded about cost estimates for the PIP, with the values provided being varied and of little apparent use. In providing for the breakdown of costs, most warned of significant costs that would arise if firms were to implement a new regime, including related to IT, internal processes, adjustment of policies, products, contracts, product manufacturing and distribution, training of staff/HR, and updates to client profiles. A similar sentiment among respondents was seen with regard to cost savings. Most respondents felt that savings are dependent on the details of the new regime, the set-up costs which should not be underestimated, and the additional costs to a bank’s current suitability and appropriateness framework.

A personalised asset allocation strategy (PAAS)

A significant majority of respondents were not supportive of the idea of standardised investor profiles, with some noting that there is currently no standardisation across firms, Member States, and the industry in general on how investors’ profiles are classified. Some said that investment service providers already have their own classification system based on the current legislation, their own products, research, and investment strategies. Others added that the use of a personalised asset allocation strategy would not be coherent with standardised investor profiling, and that harmonising risk profiles may hinder competition and reduce choices for the retail client. However, some respondents did contend that standardisation could, for some investors under certain circumstances, provide a meaningful simplification.

Regarding value-for-money when considering asset classes, a few respondents highlighted that value-for-money criteria are already applied at the level of product governance processes. Some respondents noted that each advisor should assess what products constitute best value in light of the investor’s risk appetite. Several respondents remarked that value-for-money screening can effectively be performed only when selecting an individual financial instrument within an asset class, since the earlier stage involving the establishment of the PAAS is too high-level to comprise these criteria. Various respondents stated that a financial intermediary other than the one that drew up the client assessment should be able to propose a different asset allocation strategy (other than the one originally established), given that the investment environment, the investor’s financial position as well as their risk appetite are subject to change over time. For this reason, a plan cannot be based on elements which cannot be standardised. Some respondents stated that investors should be given the choice as to whose views they trust and what advice they choose to follow, rather than be stuck with a mandatory asset allocation. Other respondents claimed that in the interest of liability, each ISP should be left with the possibility of adapting the PAAS.

In terms of additional comments, several respondents expressed the need for more time to deliberate for the issues in consideration. Various respondents stated that because the IDD and MiFID II have only relatively recently been established, more data needs to be gathered on the issues that the proposal aims to address. Another point reiterated by respondents was the fear of creating a free-riding system: if the asset allocation strategy was due to be performed without charging, there could be free-riding from other intermediaries

2.3. Outreach to stakeholders

Stakeholder outreach on suitability and appropriateness tests

The Commission organised and held several rounds of stakeholder outreach, both bilateral and multilateral, building on the feedback obtained from the responses to the above-mentioned consultations on the retail investor strategy and the suitability and appropriateness assessment. The objective of the outreach was to collect targeted data on the possible costs and benefits of option relating to Value for Money as well as the PIP to inform the preparation of the impact assessment.

Summary of outreach to NCAs

The Commission held bilateral calls with six NCAs between 24 and 28 September 2022. NCAs generally did not note any major issue with the current framework, reporting very limited (or even inexistent) client complaints to investment firms, although with some variations across Member States. With respect to the possibility of introducing a list of asset classes and a personalised asset allocation strategy, NCAs generally saw a risk of blurring the line between advised and non-advised services. More specifically, 2 NCAs noted that the definition of asset classes should be granular enough in order to be useful, while another remarked the need to carefully consider the algorithm used. Moreover, NCAs did not see the overall necessity to further standardise the suitability assessment, noting the acceptability of existing industry standards, however 2 NCAs encouraged further simplification of the assessment for retail investors. Finally, 4 NCAs considered that the appropriateness test should be reinforced with questions on the client’s financial situation, ability to bear losses, and possibly risk appetite.

Summary of outreach with the industry and consumer associations

Workshop with the industry

The Commission held a workshop with industry stakeholders on 28 September 2022. The general sentiment expressed by participants was that the current suitability and appropriateness assessment regime worked well, and adjustments were therefore seen as costly. Many participants were against having the same assessment for advised and non-advised (execution-only) services, with a large majority also against the standardisation of some elements of the suitability assessment across financial intermediaries. Amongst the participants offering execution-only services, a majority (82%) was against switching from the appropriateness assessment to a suitability assessment. Finally, only 38% of participants noted that they already identified particular asset classes suitable to their client as a result of the existing suitability assessment, whereas the remaining 62% did not.

Workshop with consumer associations

The Commission held a workshop on 28 September 2022 with two consumer associations. The general sentiment was that the most effective remedy to shortcomings in the retail framework would be a ban on inducements, and that any other measures (including the PIP) would fall short of making substantial improvements. The standardisation of certain elements of the suitability assessment was also seen as unlikely to bring additional benefits. Moreover, participants noted differences regarding the level of mis-selling across Member States, underlining that the detriment it caused to retail investors was estimated to exceed that caused by gamification. Finally, Value for Money was considered a more important topic, with the associations recommending that the Commission explored how Value for Money could be linked to the suitability assessment instead of being confined to product governance.

Stakeholder outreach on Value for Money

During the first half of September 2022, the Commission held several discussions with a total of 8 stakeholder organisations on the issue of Value for Money, based around a discussion note and an accompanying short questionnaire. The Commission worked in close coordination with both ESMA and EIOPA, who have already conducted significant work in this field. The discussions took place via dedicated meetings and were complemented by written follow-up of participants’. The latter included 3 consumer organisations as well as representatives from the banking, insurance, financial intermediaries and investment management industries.

Consumer organisations broadly welcomed the idea of a strengthened Value for Money approach as part of the strategy, while industry representatives had more mixed reactions as to whether, and to what extent, the cost effectiveness of investment products was an issue.

Consumer organisations set out clear ideas as to how a Value for Money approach could be framed in legislation. Industry representatives were generally more sceptical, and pointed to a number of practical difficulties, in particular relating to how to capture the concept of value across a broad range of very different products.

Consumer organisations suggested having concrete and granular rules, such as the development of benchmarks against which the Value for Money prospect of proposed products might be compared. Industry representative, on the other hand, were rather favouring high-level principles only. Views also differed as to whether the assessment of Value for Money should be made at the product governance or advice stage, or both.

With respect to whether new rules should apply across the full range of retail investment products or be restricted to products where problems had been identified, diverging opinions were expressed between keeping the approach broad and straightforward versus having a narrow and targeted approach.

3.4. Call for evidence

A call for evidence was opened between 3 May 2022 and 31 May 2022 223 to request feedback from stakeholders on the retail investment strategy. Stakeholders were asked to provide views on the Commission's understanding of the problem and possible solutions, as well as provide relevant information, including on the possible impacts of the different options. 43 respondents replied to the call for evidence and presented their views. Out of those 43 respondents, 30 224 had also replied to the public consultation with their views remaining broadly the same as outlined in the paragraphs above.

The views of the 13 other respondents can be summarised as follows:

1.The five EU citizens who responded raised concerns about low returns, fraud, the lack of clear and correct disclosures provided during the advice process (especially on costs) as well as on the differences in disclosure rules.

2.Two financial institutions raised the issue of investor categorisation and recommended the inclusion of a semi-professional category in EU legislation. Two firms stated their support for strong financial literacy.

3.Two representatives of the insurance industry were in favour of relying on existing rules, pointing at recent application of EU legislation for the sector, highlighting the particularities of the insurance industry and the need to properly represent insurance-specific information in the key information documents. A representative of the banking and insurance sectors remarked the need to simplify disclosures, reassess investor categorisation and avoid radical changes that could not fit the characteristics of national markets.

4.A consumer organisation pointed to the complexity of disclosure information, including on costs, conflicts of interests and sustainability. It also highlighted the need to make the suitability and appropriateness assessments more consumer-focused, increase consumer protection in the digital environment and the need to address complexity of products offered to retail investors.

Contribution from the Financial Services User Group (FSUG)

As described in the Call for evidence, the consultation strategy included a thematic discussion with a written contribution from the FSUG which was published on 17 November 2022 225 . In its position paper, the FSUG reviewed the relevant retail issues to be addressed as listed in the Commission’s April 2021 roadmap and consultation, assessing whether and how the Retail investment strategy is expected to address the topic and what could be done to further improve the initiative.

4.5. ESA recommendations

A call for advice was issued by the Commission on 27 July 2021 and addressed to: (i) both ESMA and EIOPA to provide technical advice on a number of specific areas in the field of retail investor protection; and (ii) the Joint Committee of the ESAs regarding the PRIIPs Regulation. The deadline for ESAs to deliver their technical advice was 30 April 2022.

Summary of ESMA’s recommendations

The recommendations received from ESMA related to areas concerning disclosures (both digital and non-digital), and the treatment of digital tools and channels in the existing investor protection framework. Among other things, ESMA recommended to develop a standard EU format for the disclosure of costs and charges and identify amongst regulatory disclosure a short subset of “vital information” that should be prominently disclosed in all marketing communications to clients. The inclusion of a definition of marketing communications to capture (online) advertising and messages on social media (including via the use of influencers or other third parties engaging clients) was also recommended, as was the need to clarify the powers of NCAs to intervene in a timely manner in the case of misleading marketing practices and impose the use of risk warnings for specific complex and risky financial instruments. In that context ESMA recommended to include in MIFID II an explicit mandate to ESMA to develop guidelines on the topic of marketing communications and more generally on the use of digital techniques and tools by firms. ESMA also recommended the Commission to complement its legislative proposal on the review of MiFIR through amendments of MiFID II so as to prohibit the receipt of payments for order flow from third parties based on investor protection concerns. Lastly on the topic of open finance, ESMA recommended to the Commission to consider specific potential risks and benefits when developing any legislative proposal.

Summary of EIOPA’s recommendations

EIOPA’s recommendations also related to digital disclosures and the treatment of digital tools and channels in the existing investor protection framework, however also extended to the issue of damaging conflicts of interest in the sales process and product complexity in the retail investment product market. In particular, EIOPA recommended a shift to simpler disclosures which use digital layering and interactive elements. EIOPA further suggested to address inconsistencies between existing disclosure requirements, specifically between Solvency II and the IDD. To enhance existing period disclosures at EU level, EIOPA recommended the idea of developing an annual statement, similar to existing statements in pensions legislation, providing information on paid premiums, past performance, current value of savings and adjusted individualised projections. Regarding conflicts of interest, EIOPA suggested improvements to existing rules on inducements through a combination of several solutions, ranging from further transparency to an inducement ban. In particular, EIOPA recommended enhancing existing rules on product design, oversight and governance to address value for money, undue costs and risks of misunderstanding of the main features, costs and risks of the product. EIOPA also suggested the promotion of an affordable and efficient sales process by improving the suitability and appropriateness tests. Finally, regarding product complexity, EIOPA recommended the re-evaluation of the concept of complexity in the IDD and the PRIIPs Regulation.

Summary of recommendations of the Joint Committee of the ESAs on PRIIPs

The recommendations of the Joint Committee of the ESAs on PRIIPs focused on making KIDs more consumer friendly. The ESAs recommended targeted changes to the PRIIPs Regulation as part of a review of the PRIIPs framework. In particular, the Joint Committee recommended the following amendments:

1.Improving the presentation of the KID on digital media and providing more flexibility for their digital presentation;

2.More visible presentation of ESG information in the KID through a separate section;

3.Providing more specific cost information for insurance multi-option products;

4.Incorporating more flexibility into the KID, including by allowing different types of performance information depending on the product type;

5.Making KIDs more tailored to specific product types; and

6.Clarifying and tweaking the product scope of the PRIIPs Regulation by making it clear that certain corporate bonds are excluded.

Annex 3: Who is affected and how?

1. Practical implications of the initiative

The objective of this section is to set out the practical implications for the main stakeholders stemming from the preferred options under this initiative. Those implications are assessed in more detail in the following tables, however in summary:

1.Manufacturers of investment and insurance-based investment products would be required to:

·update the PRIIPs KIDs to new formats;

·adapt marketing communications to the new rules

·provide an annual statement of cost and performance under IDD and use an EU template for the disclosure of costs

·adapt to the ban on inducements

·assess value for money on the basis of criteria and benchmarks.

2.Distributors of investment and insurance-based investment products would be required to:

·adapt business models to the ban on inducements,

·adapt suitability and appropriateness assessments to new rules;

·provide an annual statement of cost and performance under MiFID and use an EU template for the disclosure of costs

·adapt marketing communications to new rules;

·assess value for money on the basis of information received from product manufacturers, criteria and benchmarks and including distribution costs.

3.National Competent Authorities would be required to:

·supervise the extended scope of marketing communications and new rules on disclosures;

·check compliance on the ban on inducements in line with more straightforward rules;

·check compliance with strengthened value for money rules.

4.European Supervisory Authorities would be required to:

·develop more specific rules at level 2 for a range of measures stemming from the strategy:

·develop criteria and benchmarks in the context of Value for Money.

2. Summary of costs and benefits

3. Relevant sustainable development goals

Annex 4: Disclosures and marketing communications

This Annex presents in more detail the measures proposed under Options 2 and 3 of the impact assessment in the area of disclosures and marketing communications, as well as a number of technical measures.

Option 2: Targeted changes to disclosure rules to improve their relevance for retail investors

Measures relating to the PRIIPS Key Information Documents (KIDs)

This part of the annex further elaborates on the measures suggested with regards to PRIIPs KID under the Option 2 for addressing informational deficiencies.

1.Digital KIDs and the inclusion of a dashboard summary

1.1 Problem description

The Joint ESA advice on digital finance and the results of the Retail investment study evidenced that disclosures to retail investors, including those in PRIIPs KIDs, are not sufficiently adapted to the digital age. For instance, there are constraints and inconveniences to the use of KIDs on smartphones and for the use of layering 250 , which could help reduce the information overload, that was also well-documented by the Retail investment study. This deprives retail investors from receiving disclosure information in a more engaging way. The evaluation published in parallel to this impact assessment also confirms that this limits the effectiveness and coherence (notably in contrast with PEPP KID) of the framework on disclosure rules for retail investors.

Key information documents can be provided to retail investors on paper, using a durable medium or, under certain conditions 251 , by means of a website. When provided through a website, PRIIPs requires that the client can durably download a KID and consult it for a certain period. The current legal text hence does not prevent digital use of KIDs, including possible layering of information, but it also does not encourage it. While it provides some flexibility for supervisors to specify the details of the presentation of a KID when distributed electronically, it prevents changes to the order of the PRIIPS KIDs sections. Under the current legal framework, this would limit layering to presenting the information in a menu to display the headings and hide/unhide the information, which may not be sufficient. Moreover, KIDs are currently not well adapted to be viewed on different electronic devices (such as smartphones or tablets), which are becoming the dominant way in which especially younger generations of investors access information about their accounts and investment products.

At the same time, information from PRIIPs KIDs is already set to become easier to be used digitally under the baseline, as the contents of PRIIPs are set to become available through the European Single Access Point (ESAP) in a data extractable format as of 2026, pending the outcome of the negotiations on Commission’s proposal 252 . The targeted changes in PRIIPs discussed in this annex are considered to be coherent and complementary with the inclusion of PRIIPs KIDs in ESAP. While ESAP will improve access to and digital use of information in PRIIPs KIDs by requiring that they are submitted to ESAP in a data extractable format, targeted changes proposed in this impact assessment would make this information more user-friendly for the reader. Easier digital use is unlikely to significantly affect the necessity to read the KID by retail investors and financial advisors, notably when assessing characteristics of a specific investment products. As the KID presents key information about a product in one place and in 3 pages, it is expected to remain a crucial document, hence the need to make the document more user-friendly remains relevant as well.

1.2 Proposed measures

Proposed measure A1: Adapting the PRIIPS KIDs to the digital environment and increasing the usability of its information

The Advice of the ESA joint committee on PRIIPs pointed to the fact that digitization can facilitate a more consumer-centric approach and provide retail investors with interactive tools, which could make information more engaging and easier to understand. This may help overcome the fear/reticence of retail investors to engage with financial information. This option would implement specific recommendations of the ESAs outlined below:

1.Allowing the use of layered approach, i.e. interactive web-based formats would allow for the presentation of information in multiple layers, allowing for sequential presentation of product information to investors and minimizing the impression of information overload for retail investors.

2.Allowing more flexibility in the digital presentation of PRIIPs KIDs and some degree of personalisation or customisation in the 3-page PDF document:

1.The inclusion of a menu, contents sidebar or similar feature on a webpage, which the reader can use to immediately go to different sections of the disclosure (for example to information on risks, the costs of the product, or how to complain).

2.Facilitating greater inclusivity by, for example, adding functionality to make information accessible to visually impaired consumers 253 .

3.Interactivity: marketing staff should be authorised and enabled to present a personalised KID or to compare different products on the same webpage. This would allow retail investors to personalise the information, such as the holding period or investment amount, as well as choose how the information is presented, for example in a graph or a chart.

4.They should be able to retrieve the KID and the results of this simulation.

ESMA would be mandated to develop more specific rules for layering of information and digital presentation of KIDs (e.g. specifying vital information to appear in the first layer or to ensure that navigation between the layers is straight-forward).

Proposed measure A2: summary dashboard

This option would add a short summary dashboard in the PRIIPs KID, based on the example of the PEPP KID, where consumer testing has demonstrated that a dashboard may be an effective way to quickly understand key elements in a static format such as a PDF 254 . While specific contents would be determined at Level 2 PRIIPs to allow for sufficient flexibility, the PRIIPS dashboard would likely include basic elements on the costs, performance, and risks of the product. This dashboard would take some space among the 3-page PRIIPS KID, which may leave less room for other content. As is currently the case, it will be up to the RTS to determine how to distribute the available space among the different types of content required at Level 1 to ensure that the 3-page limit is adhered to.

1.3 Assessment of the proposed measures

Benefits: Improved presentation of the PRIIPs KID by greater use of layering and inclusion of a summary dashboard would make it easier for retail investors to understand key characteristics of the investment product they are considering (e.g. its costs, performance or whether there are guarantees). This would help achieve specific objective 1 ”Improve information provided to investors and their ability to take well-informed investment decisions” by helping retail investors understand investment products. Through this, it would to some extent contribute to facilitating the choice of a product that matches their needs. It would also bring an opportunity for PRIIPs manufacturers to attract retail investors to their products as consumers are more likely to purchase products they understand.

Costs:  This option implies a one-time adjustment of PRIIPs KIDs (and automated tools that the industry typically uses to develop them) to adapt to the new rules.

Affected groups of stakeholders:

1.Industry: This option would enable PRIIPs manufacturers to make greater use of layering and digital formats in KIDs. This could make disclosure documents and potentially also some of their products, more easily understandable and attractive for consumers. At the same time, while the use of layering would remain voluntary, PRIIPs manufacturers may feel competitive pressure to make use of these new possibilities. This option also implies a slight change in the format of PRIIPs KIDs. Where a new summary dashboard would be added, this would imply a one-time change of KIDs and related costs which are expected to be relatively small (as discussed above) and some prioritisation of textual information to fit in the page limit. 

2.Consumers: retail investors would clearly benefit from more user-friendly disclosures as they would be able to more effectively search for information they need to make their decision and read it with more convenience on smartphones and tablets. Especially younger consumers would benefit, as they use smartphones more for this purpose. Clear specifications at Level 2 would prevent potential misrepresentation of information when layering is used.

3.Supervisors: only limited impacts are expected for national supervisory authorities, as they would need to slightly adapt their approach to supervise and enforce rules for digital formats. Supervisors themselves have not voiced any significant concerns in this regard. No significant impact is expected on the resources of ESMA and EIOPA, as their involvement and roles under this option can be performed as part of their existing regulatory and supervisory work.  

Stakeholder views: This option has strong support of stakeholders. In response to the Call for Evidence, the majority of stakeholders including consumer associations as well as insurers and asset managers also expressed support for being able to present the KID in a layered format.

Overall, these measures are complementary and would both bring additional benefits at little expected cost and would contribute to the objectives of the Retail investment strategy. Hence, based on the assessment above, both measures A1 and A2 have been selected to be part of the preferred option.

2.    Presentation of Environmental, social and governance (ESG) information in PRIIPs KIDs

2.1 Problem description

Retail investors have a demonstrable need for information on the sustainability performance of the financial products and the companies in which they invest. Recent EU legislative initiatives such as the SFDR, the CSRD, and the provisions on disclosure in the Taxonomy Regulation seek to provide information that can be useful for investors, including retail investors, to understand relevant sustainability aspects. While much of this data has become or is becoming available through websites and documents, these disclosures may be rather complex for retail investors to navigate and may not be sufficiently visible to them.

As the PRIIPs KIDs provide key information on financial products, they should also include information about the sustainability profile of investment products. The PRIIPs Regulation already includes a requirement for ESG information to be included in the KID as part of the product’s objectives within the ‘What is this product?’ section (Article 8(3)(c)(ii)), where this is applicable. 

However, despite empowerments in the Regulation that would allow both the Commission and the ESAs to further specify these disclosures, those empowerments were not exercised, partly due to a preference to wait and adapt to the development of other EU legislative initiatives relating to sustainability disclosures. This has included, in particular, the adoption of the SFDR in 2019, followed by the ESAs’ draft RTS, specifying the content and presentation of sustainability-related disclosures in the prospectus of investment funds, in the KIDs of PEPPs, and, for IBIPs as part of pre-contractual disclosures to policy holders under Solvency II.

In the responses to the ESAs’ call for evidence on PRIIPs in the context of the Joint ESA committee’s advice, several respondents raised the issue of the inclusion of ESG information in the PRIIPs KID. In particular, EFAMA indicated that the current format of the PRIIPs KID does not allow inclusion of information on the ESG profile of investment products in a way that would provide sufficient visibility 255 . In addition, the evaluation (Annex 11) confirmed that this poses a challenge with regards to relevance of PRIIPs KIDs.

2.2 Proposed measures

Proposed measure B: ESG dashboard in PRIIPs KIDs

The proposed measure entails adding an ESG dashboard in PRIIPs KIDs, as a dedicated section that would present key ESG information about the product. A dashboard would draw from available data about investment products that are collected under existing sustainable finance disclosures under the SFDR. It would take into consideration relevant developments in the sustainable finance legislative framework. This information could include the environmental and social objectives that are pursued by the product, and relevant KPIs and infographics on the share of the product that is invested into Taxonomy-aligned activities, information on sustainability risks, the principle adverse impacts of the product, and other types of information included in pre-contractual documentation under SFDR.

Compared to exercising level 2 empowerments, the specification at level 1 would allow:

1.To present ESG information in a separate section in the KID.

2.To specify at level 1, details on the type of ESG information that should go into this section/dashboard, thereby increasing legal certainty.

Discarded option: Exercising the existing empowerments in the PRIIPs Regulation. This option would give further details on how the requirements of Article 8(3)(c)(ii) of the PRIIPs Regulation should be specified, and in particular, in light of the extensive work that has been conducted by the ESAs under the SFDR, which ESG information – and in what format – should be included in the PRIIPs KID, including what is envisaged under SFDR, and/or how the ESG reference included under the SFDR should be referenced in the PRIIPs KID (as suggested by some stakeholders such as EFAMA) and the implications from a consumer perspective.

However, this option would not allow for the creation of a separate or dedicated section of the PRIIPs KID devoted to ESG information, as the name and order of sections are governed by the level 1 Regulation. Hence, this information would be less visible to investors.

2.3 Assessment of the proposed measures

Benefits: With an ESG dashboard, the PRIIPs KID would act as a snapshot on ESG information, with a reference to the pre-contractual disclosure documents where the full set of ESG information is available. It would provide easy access to basic ESG information on an investment product in the PRIIPs KID, such as Taxonomy-alignment and ESG objectives, risks, and impacts. This would allow retail investors to easily compare products with respect to ESG elements, avoiding the need to browse through multiple documents to obtain basic product and ESG information.

Costs:  The ESG dashboard would be devised in such a way as to only reuse information, KPIs, and infographics that are already included in other pre-contractual documents, such as on the share of the product that is invested into Taxonomy-aligned activities. In this way, costs for product manufacturers would be minimal, and the information will already be under supervision through the SFDR.

Affected groups of stakeholders: 

1.Industry: PRIIPs manufacturers will need to update their KID production processes and ensure that the information from the SFDR product disclosures is included in the ESG dashboard where necessary. When SFDR product disclosures are updated, this will need to be reflected in the PRIIPs KID, but this is not a significant additional burden as there are already requirements to regularly update PRIIPs KIDs and information from SFDR product disclosures is not expected to change with a particularly high frequency.

2.Consumers: Retail investors would have easy access to ESG information and be able to more easily understand and compare products along this dimension.

3.Supervisors: No impact expected, as the information will already be under supervision through the SFDR.

Stakeholder views: The inclusion of ESG information in the KID was requested by several environmental NGOs and also by parts of the fund industry. There are no stakeholders that are specifically opposed to the inclusion of such information in the KID, as far as we are aware.

Based on the assessment above, measure B has been selected to be part of the preferred option.

3.    Transparency of costs of Multi-Option Products (MOPs) in PRIIPs KIDs

3.1 Problem description

One of the most specific technical issues identified as part of the evaluation activities 256 has been transparency on costs in the case of KIDs for insurance Multi-Option Products (“MOPs”). MOPs are PRIIPs which consist of a wrapper (insurance contract) and an underlying investment where clients choose between multiple options (up to several hundreds). In some countries, they constitute envelopes that enable retail investors to make investments under advantageous tax conditions. The investment options are usually made up of collective investment products that are themselves packaged (e.g. UCITS funds). Therefore, the retail investor bears the costs of two packages: the first is the insurance product itself (the wrapper), the second is a collective investment vehicle (UCITS or other). This double level of fees makes it difficult to understand the total costs borne by the retail investor.

The Advice of the ESA joint committee confirms that it is sometimes difficult for investors to identify the total costs related to a particular investment option and that information on the underlying investment option typically does not include the total costs of investing in that option (because the cost of the wrapper is found in a separate document). This hinders retail investors’ ability to comprehend costs related to these products and hence reduces the effectiveness of PRIIPs KIDs for this market segment. This also poses a moderate challenge to the internal coherence of the PRIIPs framework, as the level of transparency of costs of different products is not the same.

Under the PRIIPs Regulation, MOP manufacturers have two options:

1.produce as many KIDs as there are investment options. Each KID shall include both the costs of the wrapper and the costs of the chosen investment options;

2.produce one generic KID for the wrapper and one specific information document for each investment option.

Since the main purpose of a PRIIP KID is to inform retail investors on the cost of each financial product and to allow them to compare these products, the current situation leads to some concerns which have been also voiced by the ESAs:

1.It is difficult for retail investors to identify the total costs related to a particular option they are considering. The generic KID usually shows only a range of costs (from the most expensive investment option to the least expensive), but does not always identify which costs are specific to the investment option and which costs are related to the insurance contract. This would be necessary, as the costs of the insurance contract are usually not fixed and depend on the investment option selected. The costs may be sufficiently high to significantly affect the performance of this investment option, especially over longer time periods (assuming compound interest). This hinders investors’ ability to understand the implications of their choices between different options and hence could make such choices less likely to lead to the right product for them.

2.When investors are provided a specific information document for each investment option, it does not usually include the total costs of investing in that option. This does not allow sufficient transparency on total costs for retail investors. This situation could further affect retail investors’ ability to compare different MOPs with each other, especially in situations where two or more MOPs they are choosing from use a different presentation of options in the fund catalogue.

3.Information on the exact costs of the selected combination of underlying options plus package is not explicitly required by the PRIIPs RTSs, and is often not provided within the KID documentation. The provision of this information may require the dynamic calculation of costs, depending on the underlying options chosen in each case, as it is not possible to know in advance which allocation retail investors will choose.

3.2 Proposed measure

Proposed measure C: Adapting PRIIPS KIDS to MOPs

Assessing the current situation regarding MOPs, and taking into account the ESAs recommendations, the following areas for improvement were identified: 1) Improving transparency on the costs of the insurance contract; 2) Demonstrating more clearly the impact of the costs of the insurance contract, for example on the performance of the product; 3) Better facilitating comparison between retail investors' investment options within a MOP and between different MOPs; and 4) Better reflecting how different investment options can be combined within a MOP.

Building on the ESAs’ recommendations, this option would require manufacturers to develop and use an online digital tool that would allow retail investors to compare different investment options in order to establish the best combination suited to their needs. This IT tool would give dynamic “real-time” information on costs to retail investors. It should distinguish very clearly between the costs due to the wrapper and the costs due to the selected investment options. After having filtered the investment options that interest them, retail investors could then view the KID or specific information documents related to the more limited set of investment options that interest them. Under this option, the content of this tailored KID would still be derived from the KIDs drawn up by the PRIIP manufacturers, and liability would remain with the PRIIPs manufacturer.

Discarded option: An option was considered, but discarded, to require KIDs to be produced for all combinations. This option would not be optimal as it would be costly for PRIIPs manufacturers and could lead to information overload for retail investors when the number of underlying options is significant. In fact, there are signs that the existing number of KIDs for MOPs already leads to some degree of information overload. To make sound decisions, investors need to have a comprehensive view of the total costs, with both the costs related to the wrapper and those related to the underlying investments.

3.3 Assessment of the proposed measure

Benefits:  Improvements to the presentation of cost information in the PRIIPs KID for MOPs are expected to increase transparency on costs for this segment of retail investment products, where total costs are particularly challenging to understand. This would directly benefit retail investors, making it easier for them to understand key features of investment products and contribute to making retail disclosures more fit for purpose. Indirectly, this would also contribute to SO3, “Ensure that retail investors are offered cost effective products effective”, as making total costs of MOPs more transparent and easier to compare could increase the pressure on costs of these products. It would also contribute to greater coherence of the PRIIPs framework, levelling the field between MOPs and other products within PRIIPs scope on transparency of costs.

Costs:  Development of a tool to display total costs of combinations of a wrapper and different options would naturally imply certain one-off costs. These costs would be difficult to estimate and would likely vary between companies, based on the solution selected, their in-house IT resources and other factors. It is likely that such a tool would not need to be very advanced and would likely be similar to other tools that PRIIPs manufacturers already have in place, which would help ensure that costs are reasonable.

Affected groups of stakeholders:

1.Industry: There would be limited one-off costs related to the development of such online tools (as discussed above). Further economic impacts could materialise in the long run, in case the greater transparency on costs of these products leads to product switching, either towards other MOPs or for instance to UCITS.  

2.Consumers: This measure would increase transparency towards consumers with respect to total costs they would pay for MOPs (and possibly finding other characteristics about these products more easily through digital means). Indirectly, this could contribute to making these products cheaper in the long run, as it may encourage product switching. 

3.Supervisors: Only negligible impact is expected with respect to resources, as supervisors would only need to somewhat adapt enforcement to check whether the adapted rules are followed. Since the information would be presented digitally and more transparently, it would also be likely somewhat easier to check for the supervisor, effectively increasing oversight over this market segment.

Stakeholder views: Stakeholder views differ between groups. While the option would appear to be overall supported and notably by supervisors and consumer associations, stakeholders from the insurance sector are more sceptical. Some indicated a preference to keep the status quo (which however seems suboptimal from other perspectives).

Based on the assessment above, measure C would bring useful benefits and increase coherence within PRIIPs. As such, it has been selected to be part of the preferred option.

4. Clarification of the scope of PRIIPs regarding corporate bonds and immediate annuities

4.1 Problem description – corporate bonds

Another technical issue that is covered in this annex is the lack of legal clarity over the exclusion of certain types of corporate bond from the scope of PRIIPs, which according to some stakeholders is one of the factors limiting the offer of these instruments towards retail investors.

Plain corporate bonds (i.e. which are not particularly complex) have a number of advantages that would seem to justify their purchase by retail investors. For example, they are relatively easy for investors to understand and, compared to equities, corporate bonds issued by the same issuer are considered a less risky form of investment. From the point of view of the issuer, more retail investor participation in corporate bond markets would benefit companies by giving them a more diversified investor base for their funding needs.

It is therefore unfortunate that there has been a decline in the number of corporate bonds sold to retail investors in the recent years. In a study conducted in 2021 by BaFin, the German national competent supervisor notes an overall decline in the total value of annual corporate bond purchases by retail investors from 4.5 billion Euros in 2016 (which was before the entry into force of PRIIPs on 1 January 2018) to around 2.5 billion Euros in 2019. Other asset classes, such as government bonds or DAX stocks, which are excluded from the application of the PRIIPs Regulation, have not seen such declines.

It would appear that there is a link with the requirements of the PRIIPs Regulation, even as plain corporate bonds do not satisfy requirements to be included in the PRIIPs scope 257 . In 2019 the ESAs observed that: “Uncertainty over the application of the PRIIPs Regulation to bonds, has led to negative consequences for the functioning of bond markets, and access to these markets by retail investors. 258 ” 

The uncertainty was especially linked to bonds with so-called “make-whole clauses”, which is defined in the supervisory statement as “a clause that allows the issuer to pay off the remaining debt early using a reference rate to determine the net present value of future coupon payments that will not be paid”. Because the investor is exposed to a reference rate should the issuer call back the bond, some issuers had interpreted the make-whole clause as meaning that the bond was a PRIIPs, according to criteria 1 in recital (6). However, the Supervisory Statement did not settle the matter of whether bonds with make-whole clauses should be categorised as PRIIPs 259 . Although NCAs were recommended to apply the guidance when supervising these requirements, this still resulted in significant uncertainty remaining on the market. And as illustrated above, the limited offer of plain corporate bonds to retail investors may be partially explained by this legal clarity issue 260 .

In the Call for Evidence, the ESAs asked for views and experiences regarding the Supervisory Statement. The vast majority of respondents expressed support for the Statement while also stating that there remains legal uncertainty on the application of the PRIIPs Regulation to bonds, given that the Statement is a non-binding measure. Some respondents also argued that a number of additional features of bonds, in particular “make-whole” clauses, should not result in a bond being deemed a PRIIP. As a result, plain vanilla corporate bonds are still hard to access for retail investors since it has not been fully clarified that these financial products are not considered as “packaged” retail investment products (PRIIPs). Consequently, these bonds cannot be purchased by retail investors unless the issuer of the bond publishes a KID.

Apart from retail investors, stakeholders particularly affected are:

1.Non-European firms which do not explicitly market their bonds to European retail investors and therefore do not publish a KID in Europe, or

2.European firms that do not want to take the risk associated with the publication of a KID. The industry standard is that issuers sell their bonds to their bank consortium and have no further interest in the reselling of these bonds by the banks, in particular to retail investors. It would therefore seem that the entities most disadvantaged by this situation are the banks that resell the corporate bonds.

4.2 Problem description – immediate annuities

There is also an issue with the legal clarity concerning inclusion or exclusion of immediate annuities in the PRIIPs scope. Annuities are products which pay a monthly income for a certain period of time based on an existing lump sum. Within this product space, immediate annuities are retirement products without a saving or accumulation component which considerably reduces risks to retail investors. There is a problem with inconsistent treatment of these products with regards to PRIIPs scope across the Union, with only several Member States considering them to fall within the scope of the PRIIPs Regulation. The Joint Committee of the ESAs has recommended to explicitly exclude these products from the scope.

4.3. Proposed measure

Proposed measure D: Amending the scope of PRIIPs to explicitly exclude bonds with make-whole clauses and immediate annuities

This option would clarify the scope of PRIIPs at L1 to explicitly exclude bonds with make-whole clauses. Given that make whole clauses are a mechanism that allows the manufacturer to end the product early without detriment to the investor, it may be argued that this is not the type of structure that was originally intended to be captured by the PRIIPs Regulation. The amendment would hence correct this with the aim to increase legal clarity and access of retail investors to corporate bonds.

In their Supervisory Statement, the ESAs defined such clauses as ‘the inclusion of a clause that allows the issuer to pay off the remaining debt early using a reference rate to determine the net present value of future coupon payments that will not be paid’. A relevant criterion was considered to be whether the mechanism to calculate the discount rate is known in advance to the retail investor. In the meantime, a similar definition of “make-whole clause” has been introduced into MiFID II as follows: “make-whole clause” means a clause that aims to protect the investor by ensuring that, in the event of early redemption of a bond, the issuer is required to pay to the investor holding the bond an amount equal to the sum of the net present value of the remaining coupon payments expected until maturity and the principal amount of the bond to be redeemed;’ ESMA also recommended exclusion of immediate annuities from the PRIIPs scope.

This definition could also be used to identify such clauses in the context of PRIIPs.

4.4 Assessment of the proposed measures

Benefits:  

Clarifying the product-scope of PRIIPs to exclude certain corporate bonds would potentially encourage more banks to resell corporate bonds to retail investors. This could potentially increase retail investor access to wholesale capital markets and encourage corporate issuers to target retail investors. For corporate bonds for which PRIIPs KIDs are produced today, in certain cases PRIIPs KIDs would no longer have to be produced and updated, which would lead to cost savings. The magnitude of these savings is difficult to assess and is likely relatively small. The exclusion of immediate annuities (without an accumulation phase) would promote a more harmonised treatment of these products across the Union and could also positively impact their offer to retail investors. This, together with possible further smaller clarifications in the legal text, would also improve legal clarity and would imply some savings on legal advice.

Costs:  

By explicitly removing corporate bonds with make-whole clauses from the scope of PRIIPs, there may be some cases where retail investors will not properly understand or not be able to properly compare the attributes of one corporate bond with another, because they do not benefit from the short, simple, and standardised disclosures of a PRIIPs KID. This may increase costs for retail investors to locate the best investment proposition for their needs, and in a worst case could lead to instances of mis-selling. But this risk is expected to be proportionately rather small.

Affected groups of stakeholders:

1.Industry: this measure would benefit the banks that resell corporate bonds and to a certain also the issuers of corporate bonds by potentially helping them reach a more diverse set of investors, as detailed above.

2.Consumers; as mentioned above, retail investors may benefit from better access to wholesale capital markets, but would also have less access to useful disclosures.

3.Supervisors: this measure would aim to align supervisory practices across the EU by providing more clarity on how to apply the PRIIPs Regulation in the case of corporate bonds. This could save some work for supervisors in the long run. 

Stakeholder views: consumer organisations are not in favour of removing products such as corporate bonds with a make-whole clause (or any other bonds) or immediate annuities from the scope of the PRIIPs Regulation. They tend to support increasing the scope of PRIIPs to include more products, including pension products. The option is however generally supported by the financial industry and some supervisors.

Based on the assessment above, measure D has been selected to be part of the preferred option.

Measures relating to MiFID and IDD

5. Annual statements on costs and performance

5.1 Problem description

Both MiFID II and IDD 261 require that, where applicable, investors shall be provided with information on all costs and charges on a regular basis, at least annually, during the life of the investment.

The requirements under MiFID II are further specified in Delegated Regulation (EU) 2017/565 262 which clarifies that “investment firms shall provide annual ex-post information about all costs and charges related to both the financial instrument(s) and investment and ancillary service(s) where they have recommended or marketed the financial instrument(s) or where they have provided the client with the KID/KIID in relation to the financial instrument(s) and they have or have had an ongoing relationship with the client during the year. Such information shall be based on costs incurred and shall be provided on a personalised basis.” Specific rules also exist in respect of portfolio management services which include a comprehensive list of information to be provided to all clients periodically 263 .

Except in the case of portfolio management services, this means that the annual costs and charges disclosure requirement only applies if several conditions are met and in particular where there is an “on-going relationship” between the investor and the investment firm or the insurance distributor. As the notion of on-going relationship is not defined in the Directives, ESMA clarified this notion by publishing Q&A 264 with a non-exhaustive and non-cumulative list of on-going relationships. Despite such clarifications, the notion of on-going relationship remains subject to interpretation when used in the context of the ex-post annual costs statement. In situations where this condition is considered not to be met, some retail investors are prevented from receiving an annual statement on costs and charges linked to the financial products they hold.

In addition, except in the case of portfolio management services, there is no obligation to provide retail investors with an annual report on the performance of their financial instruments. The obligation under MiFID II that requires investment firms that hold client financial instruments or clients’ funds to send them at least on a quarterly basis 265 or in another periodic statement 266 , a statement of those financial instruments or funds, but does not include any obligation to include information on performance 267  or on costs and charges. The same is true for the regular cost information under IDD. Even if some distributors nonetheless provide, on a voluntary basis, such information, the lack of legal requirement to do so leaves many retail investors without this very useful information. Without a complete annual report, covering the different elements necessary to assess the effective performance of their financial products, many retail clients do not have a comprehensive view on their portfolio’s performance which would enable them to consider the quality of their investments and investment services and to assess any need to adjust in order to achieve a better outcome.

While mandatory annual updates on the development and performance of an investment are only provided for pension products, in the form of the Pension Benefit Statement under the IORP II Directive 268 and the PEPP Benefit Statement under the PEPP Regulation 269 , at national level, several Member States have introduced periodic disclosure requirements for life insurance products or insurance-based investment products. 270

In the EIOPA advice on retail investor protection, EIOPA specifically recommended the development of an annual statement in the IDD that would be similar to the Pension Benefit Statement for IORPs and PEPPs. The introduction of such a statement appears particularly appropriate in the case of IBIPs, as IBIPs are long-term structured products which are very often purchased as an alternative or a complement to pension products. In view of this functional equivalence with pension products, EIOPA recommended that the content of the annual statement should to a large extent be similar to that of the Pension Benefit Statements. It proposed in particular to include adjusted individualised projections as important information for investors to take into account when considering if they are on track to meet their aims for retirement saving or other long-term savings objectives.

5.2 Proposed measures

Proposed measure E: Introduction of annual statements on costs and performance

In order to ensure that all retail investors get, at least on an annual basis and regardless of their relationship with their financial intermediary, the necessary information to evaluate the costs and performance of their portfolio, an obligation would be introduced for investment firms and insurance undertakings to present an annual statement on costs and performance to all retail clients in a way which would allow them to easily appreciate the costs and charges paid and the effective performance of their financial products.

This obligation would be introduced at Level 1, requiring investment firms and insurance undertakings to provide all their retail investors who owned financial instruments in a securities account held with such firms or have insurance-based investment products manufactured by them, with an annual statement including a global and detailed view on all elements necessary to appreciate the costs and the performance of their portfolio. The statement should provide in an easy-to-understand format, the below personalized key information:

For investments falling under MiFID II, this annual statement would contain at least the following elements:  

1.details of all financial instruments held by the investment firms for the client at the end;

2.the market or estimated value (when the market value is not available) of the financial instruments;

3.the total costs and charges (including tax) related to both the financial instrument(s) and the associated investment and ancillary services incurred during the reporting period. The total costs and charges would nonetheless itemize separately (i) total costs and charges charged by the investment firm for the investment service(s), (ii) total costs and charges charged for the financial instruments, (iii) total third party remuneration received or paid by the investment firm in connection with the services provided to the retail client and (iv) total taxes withheld by the firm and borne by the retail client. A more detailed breakdown per financial instrument and per service would be provided by the firm upon request of the client;

4.the total amount of dividends, interest and other payments received during the reporting period in relation to the client’s portfolio. A more detailed breakdown per financial instrument would be provided by the firm upon request of the client; and

5.the annual performance of each financial instrument held by the client and the annual global performance of their portfolio (at least for the financial instruments purchased through an investment advice service or RTO service or execution of order service of the firm).

For insurance-based investment products falling under the scope of IDD, the annual statement would have to be provided by the insurance undertaking manufacturing the insurance-based investment product. It would contain the following elements:

1.Current value of the investment;

2.Payments made by the retail investor (investments, deposits, contributions, premiums, fees, etc.) over the previous 12 months, deducting any withdrawals made;

3.A breakdown of all costs and charges incurred, directly or indirectly, by the retail investor over the previous 12 months and the amount of any remuneration paid to the distributor on an ongoing basis by the manufacturer or another party except the customer in connection with the distribution of the investment product; comparison of the costs with benchmarks for comparable products (developed in the context of VfM);

4.Past performance of the investment (during the relevant year compared to previous periods);

5.Adjusted individual projections of the expected outcome at the end of the contractual or recommended holding period, based on the current value of the investment and its performance development so far and linked to the pre-contractual performance scenarios in the PRIIPs KID, and a disclaimer that those projections may differ from the actual final value of the investment;

6.Information on the conditions and financial consequences of an early termination of the investment or switching of providers, including, in the case of an insurance-based investment product, the surrender value and conditions for surrendering the insurance policy;

7.Information on what happens when the insured person dies or another insured event occurs;

8.In the case of unit-linked protection policies for which the policy terms and conditions provide for periodic premium reviews, the projected premiums required to maintain existing protection benefits until the ages of 55, 65, 75 and 85.

5.3 Assessment of the proposed measure

Benefits: The information provided in the annual statement would enable all retail investors to get a comprehensive view of their portfolio’s performance and the global costs they bear, without the need to collect all necessary pieces of information or to make calculation by themselves. It would enable them more easily to consider the quality of their investments and investment services and, where needed, to adjust them in order to achieve better outcome. The standardised format of the document would greatly contribute to these benefits and also allow for better comparability. More broadly, this transparency may also lead to increased competition on the supply side, eventually putting downward pressure on prices charged for products and services from which all investors benefit collectively. It could also facilitate cross-border business by ensuring a harmonised standard of investor protection. As regards supervisory authorities, this measure would support their supervisory actions by giving them the possibility to access more and better data on costs and charges and performance, helping them to better compare the effective value for money of the financial products.

Costs: Investment firms and insurance distributors are already subject to annual ex-post disclosures on costs and in some cases, on performance to their clients. The introduction of the ex-post annual statement on costs and performance would deepen the existing disclosure obligations in terms of (i) content, by including the element of performance and payments received (in addition to costs) to all clients under MiFID and IDD and personalized projections in relation to clients under IDD, and (ii) broaden the circle of clients receiving such annual statement under MiFID, since the obligation to provide an ex-post annual information would apply in relation to all clients (and not only to those with whom the investment firm has an ongoing relationship or are under portfolio management) 271 .

The introduction of the ex-post annual statement on costs and performance would represent a one-off cost for the industry, which would consist of costs for the adjustment of existing (IT) systems so that the element of performance and payments received (and projections in the case of IDD) could also be provided and that the statements would be extended to all clients. In the Impact Assessment accompanying the Proposal for the IORP II Directive (SWD(2014) 103 final of 27.3.2014), the Commission estimated the one-off cost for the implementation of a short and standardised annual Pension Benefit Statement containing both personalised and generic information about the pension scheme, on average, at around 7 EUR per member (which would equal EUR 7.7 per member adjusted to 2022 price levels). As investment firms and insurance undertaking are already expected to provide annual information on costs to clients, the calculation of the one-off costs could be based on an assumption that that the changes/updates of existing systems would amount to a range of 5-15% of these costs (per client). For an investor base of between 49-58.5 million retail investors 272 the one-off costs could be estimated to be in the range of EUR 19 – 67.5 million. It should however be noted that, considering the divergent interpretation of investment firms and Member States on the qualification of “ongoing relationship” (see above) and the different practices of investment firms (some providing on a voluntary basis extensive information, beyond the legal requirements), it is not possible to estimate the number of new clients under MiFID who at present do not receive annual information on costs. There is also a substantial percentage of clients under MiFID who already receive information on performance (e.g. clients under portfolio management). For these clients, the systems of the investment firms would already be adjusted to provide such information. It was however not possible to gather data on the number of clients under portfolio management to be able to deduct these costs from the estimated one-off costs.  

In relation to ongoing costs, the Retail investment study quantified the existing costs for private pensions and insurance products covering the preparation and update of periodic information at EUR 5 per client per year 273 . It could be assumed that the costs for the ex-post annual statement on costs and performance would be in a similar range (if not lower). The ongoing costs for investment firms and insurance undertakings are not expected to increase in relation to clients who already receive annual information, since after the adjustment of the systems, the information that is already available at the level of the firm (or easily retrievable from trading venues platforms/websites) could be provided to clients without any significant additional costs. As the number of clients under IDD who already receive annual information (on costs) would not increase compared to the baseline, the ongoing costs for insurance undertakings are not expected to increase. For investment firms an increase of ongoing costs is expected in relation to clients who currently do not receive annual information on costs (e.g. clients with whom the firm is not considered to have “an ongoing relationship”). For those clients, investment firms would start to incur ongoing costs of EUR 5 per client/per year. Considering the divergent interpretation and practices of the investment firms and Member States on the qualification of “ongoing relationship” in the context of costs disclosure (see above), it is not possible to estimate the amount of new clients under MiFID who at present do not receive annual information on costs. 

No material increase of costs is expected for the NCAs, as such controls already exist and existing IT tools should be able to absorb a bigger amount of data. No significant impact is expected on the resources of ESMA and EIOPA, as their involvement and roles under this option can be performed as part of their existing regulatory and supervisory work.  

Finally, this option would impose no new direct costs on retail investors, but there is a risk that investment firms and insurance companies may shift the costs they bear to provide such enhanced annual statements onto their retail clients via an increase of their investment and ancillary services costs.

Affected groups of stakeholders:

Industry: This option would allow investment firms and insurance undertakings to more clearly and in a standardized way communicate with their clients the information relating to their investments. Enhanced transparency may also lead to increased competition on the supply side, eventually putting downward pressure on prices charged for products and services to retail investors. This development could be further stimulated by the appearance of service providers and advisers focusing on switching opportunities for retail investors.

Consumers: As the existing requirement to provide an annual statement on costs and charges to retail investors will be extended to all MiFID II and IDD retail investors, regardless of their relationship with the firm, and would also include additional elements, in particular information on performance, all retail clients would benefit from increased transparency, enabling them to more easily compare different products and consequently take better informed investment decisions. Investors would obtain a more comprehensive view concerning the costs and performance associated with their investments. This information would be backward looking and personalised. It would allow retail investors to get at a glance a global view or a detailed view should they request so, on how their financial instruments have performed over a year time, taking into account all costs and charges and any received payments. As information would be provided on an annual basis, clients could better assess the quality of their investments and decide whether to hold their investments, reinvest or disinvest if deemed appropriate. In the case of insurance-based investment product which are typically bought for retirement or other long-term investment purposes, adjusted individualised projections and additional information on termination and switching options will allow retail investors to check if they are still on track to meet their savings objectives and to take the necessary steps if this is not the case.

Supervisors: The measure is expected to help supervisory authorities in their control processes. Allowing access to more data on costs, charges and performance to supervisors, would help them to better compare the effective value of financial products marketed to retail clients. It is not expected that this measure would lead to any material increase of costs for the NCAs.

Stakeholder views:

In the insurance sector, representatives of insurance intermediaries and consumers are supportive of the annual cost and performance statement which they see as an important improvement of investor information. They in particular call for the inclusion of information about past performance and performance projections. On the other hand, a majority of insurance undertakings expressed criticism, pointing out that the existing information and annual statements, where provided for under national law or voluntarily by firms, are sufficient and also better adapted to the specific features of the different Member States. They were particularly critical of the proposal for personalised performance projections for IBIPs, which they consider overly burdensome and difficult to realise in the case of products which have no clear holding period. Should an annual statement be realised on a European-wide level, it would have to replace existing national solutions to avoid duplication and overlap.

A large majority 274 of distributors of investment products also expressed a strong reluctance to change the current rules on costs and charges disclosure, considering the current regime as strong enough to ensure transparency of costs and cost impacts for retail investors. They expressed concerns that the enhanced annual statements on costs and performance may lead to an information overload. Others (in particular consumer associations) however considered that the current regime is not always efficient, as the information may be too complex and confusing for retail investors. Simplification and standardization appear particularly useful in a digital context.

Based on the assessment above, measure E would bring useful benefits and increase coherence between MiFID and IDD. As such, it has been selected to be part of the preferred option.

6. A standard EU format for costs disclosure under MiFID and IDD

6.1. Problem description:

The divergent use of the terms to describe and present costs to retail investors has been signalled as an information deficiency. In practice, this results in the use of a plethora of different words (e.g. costs, charges, expenses, fees, commissions etc) to present the same or similar concepts which on the one hand can easily confuse or mislead retail clients, and on the other hand make it difficult to compare the costs across different products. The same applies to the format for the presentation of disclosure of costs and performance: there is currently no standardised format in the EU.

In the ESMA advice on retail investor protection, ESMA highlighted that “the discretionary powers given to Member States with regards to the format that can be used to disclose relevant information do not appear to be an optimal solution to create a single market of financial products and services” 275 . A majority of respondents (62.5%) to the public consultation on the Retail investment strategy mentioned that they are aware of overlaps, inconsistencies, redundancies, or gaps in the EU disclosure rules with respect to the way product cost information is calculated and presented. The Retail investment study also concluded that costs disclosure rules and practices were complex and sometimes inconsistent, making comparison and the use of this information challenging for retail investors. In the vast majority of product information documents which were reviewed, retail investors were presented with multiple cost items. To allow investors to clearly identify and compare costs and performance in the disclosure documents, it is important to make such disclosures more standardized and understandable for retail investors. In the context of an increased provision of cross-border services by digital providers, the lack of standard EU format for the disclosure on costs does not facilitate comparability and development of cross-border investments.

6.2 Proposed measures

Proposed measure F: Introduction of a standardized EU format for the disclosure of cost under MiFID and IDD

This measure would imply the introduction of a standardized EU format for disclosures in the area of costs. ESMA and EIOPA would be mandated, after having conducted consumer and industry testing, to develop draft regulatory technical standards to specify i) the standard costs and charges terminology to be used by the investment firms when delivering statements on costs and charges and ii) the relevant format for the presentation of such statements. This standardization aims to improve understandability and comparability of cost disclosures for retail clients.

The relevant regulatory technical standards would likely need to cover several formats, depending on the category of financial products and whether the information on costs is to be provided before or after a transaction on financial products takes place 276 . 

6.3 Assessment of proposed measure

Benefits: An EU format for the disclosure of costs provided to retail clients would make it easier for retail investors to understand the impact of the different costs on the performance of their considered or on-going investments. This would help achieve specific objective 1 ”Improve information provided to investors and their ability to take well-informed investment decisions”. This measure could facilitate the choice of a product that matches the retail client’s needs.

Costs: This measure implies a one-off cost for the industry to adjust existing systems for the new EU standardised formats for costs disclosure. This will require costs for the automated tools usually developed by the industry for this kind of reporting. It may also require firms to adjust their pricing strategy in view of the cost transparency this new format should bring and the enhanced competition it might create. The exact impact will also depend on how the format is developed, which will be assessed in the context of the development of the relevant Level 2.

Affected groups of stakeholders:

1.Industry 

The industry would benefit from an EU template, as firms would no longer need to conceptualize standards in-house. This does not apply to companies that have already established disclosure formats, which would need to be realigned to the new template. Considering that firms already have in place templates for costs disclosure, the implementation of the new standard will lead to one-off compliance costs for investment firms and insurance undertakings.

2.Consumers

An EU standard for the information shown to clients would harmonise existing disclosures on costs across different investment firms and insurance undertakings. Investors would benefit from more and better streamlined transparency and would therefore be able to better compare costs product-by-product.

3.Supervisors

The development of a standardized template would facilitate the work of supervisory authorities as there would be less divergence between the documents they would have to review. It would also provide supervisors with relevant and comparable data for their supervision. Furthermore, it would allow them to check on a bigger scale the costs communicated ex-ante and the costs actually charged to retail investors. No significant impact is expected on the resources of ESMA and EIOPA, as their involvement and roles under this option can be performed as part of their existing regulatory and supervisory work.  

Based on the assessment above, measure F would bring useful benefits and increase coherence within MiFID and IDD. As such, it has been selected to be part of the preferred option.

Option 3 – Addressing shortcomings in relation to marketing communications

7. Addressing the relevance of information in marketing communications

7.1 Problem description

Retail investors currently receive abundant information about investment products and services, through multiple sources, including marketing communications. Considering the complexity and abundance of the information provided, retail investors are often inclined to base their decisions on retail-friendly marketing information 277 . Such information can consequently play a key role in investment decisions, particularly if it is the first information that retail investors receive. This is due to the fact that individuals tend to be more influenced by the first piece of information they receive (put more focus on it) in relation to a specific product 278 .

Source: IOSCO report on retail distribution and digitalisation – October 2022

Figure:

Identifying key information in marketing communications can be difficult for retail investors, as some material information (e.g. on the costs or the risks) may be hidden or missing, 279 or the way key information is presented may not be appealing (e.g. presentation of risky or inappropriate elements in particular may be minimised compared to a more prominent presentation of positive and attractive elements) 280 . Unbalanced presentation causes informational deficiencies that hinder the ability of investors to make well-informed decisions and is particularly impactful in the context of an increasing use of digital channels for retail investing.

In a digital context, retail investors are often exposed to influences from social media and online channels (see table above). Online marketing tools in particular present risks, such as the possibility for firms to exploit investors’ biases, to target inappropriate market segments, to push unsuitable products 281 or to distort the investor’s ability to appreciate risks and costs 282 . Marketing techniques can also use segmentation, personalisation and retargeting methods that exploit investors’ biases 283 , as well as product placements, enticements and reward schemes via social media and influencers 284 . The use of behavioral biases and the lack of financial education result in consumers taking ill-informed choices and doing so on the basis of information or advice they might not have consciously perceived. Such digital marketing approaches present particular challenges in regulation, especially where the marketing is carried out by a third party, such as an influencer, and not directly by the firm.

According to the aforementioned IOSCO’s study, 10% of surveyed firms already use influencer marketing, and the majority are considering increasing or starting to use influencers as part of their marketing strategy 285 . The growing interest of firms to use influencers is taking place in a context of growing use of social media by retail investors. The December 2021 Dutch AFM’s study into financial influencers 286 showed that 15% of execution-only investors with less than two years of investment experience use social media as a source of information. These percentages have likely further increased in the meantime, emphasizing the need for clarification in this area. The French AMF has also been paying specific attention to the growing trend of influencers in the financial products and services sphere, in particular by developing an educational module in partnership with the French ARPP (Advertising Self-regulatory Organisation) on best practices and rules applicable to influencer campaigns and communications on financial products and services. Influencing practices are also being scrutinized in other jurisdictions (e.g. the US, where a recent SEC ruling explicitly required disclosure by influencers of the remuneration they receive for the placement or advertisement of financial services or products 287 ). ESMA has also highlighted that finfluencers, which are already required to flag sponsored posts under general advertising rules, should also comply with rules for financial products and services communications and ensure that the information they present is ’fair, clear, and not misleading’ 288 .

The use of behavioural biases of consumers, through gamification techniques and techniques that present certain information more prominently, or in other cases ‘hidden’, is also increasing and becoming a source of concern 289 . Such techniques, when applied to communications by firms, can entice consumers to purchase a product or use a service. This can be achieved through various techniques, such as use of limited offers, reward programs, sign-up bonuses, etc. 290 .

In order to the protect retail investors from misleading or harmful marketing practices, it is important that online activities, in particularly through third parties, such as influencers, are covered by the existing rules on marketing and fall under the responsibility of the relevant investment firm or insurance undertaking. However, as indicated in the ESMA advice on retail investor protection, there is confusion in the application of the definition of marketing communications as to whether online advertising and firms’ private messages to clients and potential clients on social media fall under this definition 291 , both when communicated directly by the firm or through third parties’ social media (i.e. ‘finfluencers’ who operate on behalf of financial service providers).

NCAs also face significant challenges in monitoring new forms of marketing communications, for instance as regards the use of finfluencers by firms or other developing means to engage clients via third parties through social media 292 . While it should be clear that the outsourcing of marketing to an influencer is ultimately the responsibility of the (management of the) financial service provider, who should monitor whether the information provided by finfluencers complies with the necessary regulation, ESMA and EIOPA consider that more detailed rules on the control and oversight to be exercised by investment firms and insurance companies on marketing communications is necessary to ensure a consistent approach across all Member States. A majority of respondents in the public consultation considered that there was a need for further EU coordination/harmonisation of national rules on online advertising and marketing of investment products 293 .

7.2 Proposed measures

Proposed measure G1: introduction of vital information in marketing communications 

Under this measure, the existing requirements on marketing communications would be strengthened by requiring firms (and where relevant third parties) to include all “vital information” in marketing communications relating to financial products and services. Such vital information (i.e. essential characteristics of the product or the service) should appear in a prominent way and be accessible at a glance, in all marketing communications 294 . The Commission would be empowered to adopt a delegated act to specify the essential characteristics of financial instrument(s) or investment and ancillary service(s) to be disclosed in all marketing communications targeting retail clients.

The vital information to be displayed should ensure that retail investors get an easy overview of the key product features of the financial instruments, including the main risks. This necessity of this measure is reflected in the strong growth of the use of online marketing 295 over the past ten years and future trends 296 for the increasing use of such marketing tools 297 .

Proposed measure G2: inclusion of a definition of “marketing communication” under MiFID and IDD

Under this measure, a definition of marketing communication would be introduced in MiFID II and IDD to provide clarity as to the application of the existing rules on activities that are to be considered as marketing communication, in particular as it is used in a digital environment. A definition of marketing communication would ensure better compliance with existing MIFID II and IDD rules and a provide clearer mandate for enforcement.  

MiFID II states 298 that “all information, including marketing communications, addressed by the investment firm to clients or potential clients shall be fair, clear and not misleading. Marketing communications shall be clearly identifiable as such”. However, MiFID II does not provide for a specific definition of “marketing communication” and has no explicit provisions that apply to the digital marketing of financial products and services. Delegated Regulation 2017/565 provides some clarifications and requirements 299 as to the need for the marketing materials to be fair, clear, not misleading and consistent with any information provided by the firm to its clients in the course of providing investment and ancillary services. It also includes precise requirements as to the content of the marketing communication 300 . The same Delegated Regulation also specifies 301 that a recommendation as defined in Article 3.1, point 35, of the Market Abuse Regulation (MAR) 302 , not meeting the conditions to be qualified as investment research shall be treated as a marketing communication and clearly identified as such. However, those requirements do not address, or not properly enough, the identified problems, especially in a digital context.

The proposed measure would clarify the concept of marketing communication in MiFID II and IDD to ensure that all marketing communications and advertising (in particular those carried out digitally), made directly or indirectly by an investment firm (including through third parties, such as influencers) in any format and using any marketing techniques, with the aim to offer, market, recommend, suggest or entice any investment in, or promote, in a direct or indirect way, any specific financial products or services under MiFID II and IDD or the activities of firms falling under the scope of MiFID II and IDD would be covered by the rules on marketing communication. The definition of marketing communication would thus also cover advertisement 303  (together with promotions, sales, branding and campaigning), social media messages, the use of third parties, nudging techniques and tools, and surreptitious communication 304 . 

The definition would also capture all marketing practices aimed at influencing investors’ decisions to capture the risks highlighted by IOSCO (i.e. new marketing practices such as for instance influencer marketing (with influencer endorsements) and placements in audio-visual content 305 ). The same would also apply to the use of tools and techniques that directly or indirectly entice consumers to purchase products or to use investment services more frequently 306 or in a gamified manner 307 .

The definition would also ensure that MiFID II and IDD rules apply to marketing communications that do not target any specific MIFD II, respectively IDD, financial products or services or any specific firm, but rather refer to a broad category of such financial products or services or to broad category of firms, with the ultimate aim of enticing retail investors to invest in those products or to subscribe to those services, or to consider trading with a specific category of those firms. It would also capture marketing communications that do not refer precisely or globally to any MiFID II/IDD financial products, services or firms but nonetheless entice retail investors to consume MIFDI II/IDD services.

The clarification of the notion of marketing communication would be accompanied with measures reinforcing the investment firms’ obligations to have internal policies and procedures sufficiently strong to ensure investor protection when it comes to marketing communication. Those policies and procedures will also concern the management’s responsibility for the accuracy and non-misleading aspect of the marketing communication, including when provided via social media and other third party channels.

ESMA and EIOPA would be mandated to develop guidelines on marketing communications. This tool would ensure the necessary flexibility to quickly adjust those guidelines to evolving marketing communications and practices. It would also complement the existing supervisory convergence tools that the ESAs and supervisors may use to address the various issues on misleading marketing.  

7.3 Assessment of proposed measures

Benefits: Measures G1 and G2 would ensure better protection of retail clients by ensuring: i) more transparency on the nature of the marketing communication made, directly or indirectly, by investment firms, also through digital channels (e.g. social media); ii) reducing the lack of clarity about the scope of the definition of marketing communications and the applicability to influencers and other alternative means of advertisement, iii) reinforced firm’s procedures and policies on marketing communication and on management’s responsibility, facilitating legal actions in case of misleading marketing communication and iv) the inclusion of key elements related to financial products and investment services, in all marketing communications. These measures would increase the quality of information provided to investors, which would contribute to better understanding of marketed products by retail investors. These measures would also facilitate interventions and enforcement on the part of the competent authorities in relation to (misleading) marketing communications.

Costs: For the industry, it is expected that compliance obligations would increase. The requirement to have vital information in all marketing communications and the clarification as to the concept of marketing communication, enhanced with reinforced organisational and responsibility rules would require additional oversight by investment firms, leading to higher regulatory costs. However, the measures would also be expected to provide further clarity on the regime and reduce grey-areas, providing additional certainty for ensuring compliance. This could lead to cost reductions for compliance and legal advice, especially for smaller firms, due to the additional clarity provided by the definition. The measure would not impose direct costs on investors.

Affected groups of stakeholders:

1.Industry 

Measure G1 would help the industry to know precisely the essential elements that should always be in a marketing communication and how they should be presented. Measure G2 would facilitate understanding by firms and third parties about with whom they may interact, and about what constitutes a marketing communication under MiFID II and IDD. This would consequently facilitate better compliance with relevant rules on marketing communications.

2.Consumers 

The measure would help retail investors more easily identify digital marketing of financial products and would help ensure that such marketing provides them with clear information about the products. This would contribute to specific objective 1 “Improve information provided to investors and their ability to take well-informed investment decisions”. The proposed measures would also help reduce the lack of clarity as to the applicability of the rules to influencers and other alternative means of advertisement. Clarification as to the responsibility of the firms’ management as regards the fair, clear and not misleading aspect of the marketing communication, including when made via a third party, would facilitate legal actions of retail clients and would increase their protection.

In addition, with harmonisation at the EU level, more equal protection for retail investors would be ensured in cases of cross-border activity by firms, regardless of their location: the cross-border nature of digital platforms and channels used for marketing communications pleads for further harmonisation of the marketing communication definition at the EU level. The use of digital communication channels, and especially social media, is not confined to the territory of a specific member state.

3.Supervisors

The requirement for firms to have vital information, presented in an accessible and understandable way, in all their marketing communications, would facilitate the control of those communications by the supervisory authorities and should not trigger any material additional costs. Clarification as to the concept of marketing communication and the responsibility of the firms’ management for such communication would allow for easier intervention and enforcement by supervisory authorities. This measure would also provide a basis upon which the enforcement in relation to novel marketing techniques, such as influencer campaigns, could be applied. While the monitoring role and supervisory power of the competent authorities in the domain of marketing communications would remain the same, to increase efficiency of any supervisory actions there may however be a need for technology-based detection and investigatory techniques and qualified staff, which may involve one-off and further costs, depending on the volume of identified issues and intensity of supervision decided on by NCAs. Nevertheless, No significant impact is expected on the resources of ESMA and EIOPA, as their involvement and roles under this option can be performed as part of their existing regulatory and supervisory work.  

Stakeholder views:

The public retail consultation showed a majority of respondents (more than half representing the industry) supporting the need for further EU coordination/harmonisation of national rules on online advertising and marketing of investment products. A harmonised definition of “marketing communications” and a single set of requirements for the content of these communications, including those delivered through digital means, was viewed as allowing for more consistent information and a reduction in costs that would benefit all EU investors. They also argued that further harmonisation would ensure the same level of protection for the investors and the same market conditions for the various product and service providers. It was viewed as crucial that new trends such as influencers, personalised targeting and online disclosures (examples mentioned by respondents) were regulated at EU level for investment products. Those respondents who considered that there was no need for further EU coordination on online advertising and marketing of investment products, argued that current rules were sufficient and problems, where they existed, related more to the lack of supervision in certain Member States.

Based on the assessment above, measure G1 and G2 would bring useful benefits and increase coherence within MiFID II and IDD. As such, they have been selected to be part of the preferred option.

Annex 5: Financial literacy

1.Introduction

1.Background and problem definition

The level of financial literacy 308  in the EU is low. The most comprehensive exercise measuring financial literacy is the Standard & Poor’s Global Financial Literacy Survey conducted in 2014. According to the survey, financial literacy levels in the EU range from as high as 71% for the population in Scandinavian countries to as low as 13% in the Southeast of the EU, demonstrating that there are large differences among Member States. The OECD/INFE 2020 International Survey of Adult Financial Literacy confirmed this. The latest OECD survey of adult financial literacy 309 (2020) showed that the combined financial literacy score in 14 EU Member States varied between 11.1 (Italy) and 14.7 (Slovenia) out of a maximum score of 21 310 . The survey did not ask for expert knowledge, but for a general understanding of key concepts such as inflation, interest rates and risk diversification. The financial knowledge score 311 , which is part of the combined financial literacy score together with attitudes and behaviour, was also relatively low: the average score of the EU Member States was 6.1, which is lower than the OECD average of 6.2. Furthermore, five of the 14 participating EU Member States scored lower than the average. Finally, financial literacy and education were identified as an issue in the EBA’s Consumer Trends Report (CTR) 2018/19 312 , similarly to the issue of insufficient digital financial literacy, raised in EBA’s Consumer Trend Report 2020/21.

Low financial literacy has an important impact on retail investment more generally and on the effectiveness of retail investment protection measures laid down in EU law, more specifically. Low financial literacy reduces the effectiveness of disclosure of financial information provided to an investor, as it implies that the average citizen may lack the ability to properly understand the information received. At the same time, it increases reliance on advice, be it good or bad, due to the lack of awareness of the available tools (instead or in addition to professional advice) to form an opinion on financial products. Citizens may also not be aware of the importance of a budget and savings or may not even know where to start or what questions to ask. Finally, many citizens struggle to understand the basic financial concepts of interest, compound interest, and how to calculate them; the relationship between risk and return; the concept of risk diversification and/or the concept of inflation. The uptake of FinTech and digital tools in the area of financial services raises additional challenges for citizens who may not have a sufficient level of digital literacy. 313 Similarly, with the rise in appetite for ESG products, investor education is needed to make sure that on the retail side there is a proper understanding of ESG product offerings and disclosures, as well as of the sustainability impact of different investment strategies 314 .

Increasing the level of financial literacy of citizens as retail investors can provide them with a greater understanding of the risks involved when investing money, can help them plan and make better budgetary decisions and participate in capital markets in a way that meets their needs. These skills will be even more important for individuals (and, indirectly, businesses) as the economy gradually recovers from the COVID crisis, as well as in context of the current inflationary trends that can erode the value of consumers’ savings.

Financial literacy is a Commission priority 315 aimed at contributing to an EU economy in which retail investors are financially resilient and feel empowered to make decisions that contribute to their financial wellbeing. The Commission has therefore recognised the need to address it as part of its broader Retail Investment Strategy.

A growing body of evidence shows that well-designed financial education programmes have had a positive effect on both financial knowledge and downstream financial behaviours 316 . In this context, the Commission is developing several measures to support Member States in improving the financial literacy levels of their citizens. For instance, in January 2022, the Commission and the OECD-INFE published their financial competence framework for adults in the EU 317 . The framework was developed jointly with EU Member States to create a shared understanding of financial competences for adults across the European Union 318 , and defines the competences that individuals need in order to make appropriate decisions in the area of personal finance. 319 The framework was made available for voluntary uptake amongst Member States and stakeholders. However, its adoption is not a silver bullet that could alone solve the problem and, since the latter is likely to persist, additional actions are needed to improve financial literacy in the EU, especially when it comes to investing in capital markets. 

In order to address this problem, the High Level Forum on CMU suggested that the co-legislators should build on the principle set out in Article 6(1) of the Mortgage Credit Directive (MCD) 320 and reflect it in other financial sector legislation, with a view to:

1.Requiring Member States to promote formal and informal learning measures that support the financial education of consumers in relation to responsible investing;

2.Requesting the Commission to assess the financial education available to consumers in Member States and to identify best practices. The Commission is also requested to assess which sectoral legislation would be the most appropriate to extend the principle set out in Article 6 MCD (e.g., MiFID, IDD, PEPP, UCITS, PRIIPs, etc.).

For this reason, in Action 7B of the 2020 CMU Action Plan 321 the Commission committed to assess the appropriateness of extending the principle enshrined in Article 6 MCD to relevant sectoral legislation, with the objective of promoting learning measures to support the financial education of consumers in the context of retail investment.

The present Annex to the impact assessment explains why a provision in EU law addressed to Member States to put in place measures supporting the education of consumers in relation to the distribution of investment products would address the identified problem of low levels of financial education in the EU. It considers options of how to address the problem in the most effective and cost-efficient way for stakeholders. In doing so, it is aligned with the aims of the first specific objective (SO1) laid out in chapter 4.2 of the main body of this impact assessment, that is to improve retail investors’ ability to take well-informed investment decisions 322 . The measure presented in this Annex, on its own, however, cannot address the identified problem in full and should only be seen as a complementary or flanking measure to other measures assessed in this impact assessment, as well as to other ongoing or future actions taken by the Commission and Member States in the area of financial education (including the ones mentioned above).

1.Effectiveness of Article 6(1) MCD and merit to its extension to other areas

The transposition deadline for the MCD was 21 March 2016. The conformity studies performed during 2016-2017 by an external contractor showed that 7 Member States (CY, ES, PT, MT, LU, IE, RO) literally transposed Article 6(1) MCD and delegated the competence to an NCA. Other Member States (DK, EE, PL, LV), instead, provided for a general obligation to promote financial education or knowledge/awareness on financial products. Overall, the studies identified several initiatives that have been put in place, in particular by NCAs, to promote and support financial education. However, while it is likely that many of these initiatives were triggered (at least in part) by the implementation of the legal provision in MCD (or the corresponding national provision transposing it), it was difficult to establish the exact extent to which they were specifically linked to the MCD’s implementation.

Examples of such initiatives (identified in the studies) include:

1.Provision of information about mortgages (e.g. mortgage borrowing process, how to best choose the mortgage credit, responsible borrowing, rules applicable during the credit lifetime, consumers’ rights), on consumer financial education websites set up/managed by NCAs or on NCAs’ websites (AT, BE, DE, RO, LT, EE).

2.Establishment of platforms to enhance the financial awareness by organising events (NL).

3.Provision of guidance documents containing information about types of home loans, mortgage loan process and access, costs and other expenses, event of default on the mortgage, consumers’ rights, management of personal finance, dispute resolution (DK, ES 323 , IT 324 ), mortgage shopping around checklist (IE). ES and IT published/updated the guidance documents in May 2016.

4.Organisation of seminars for teachers and students concerning credit (AT).

5.Establishment of a programme in 2016 to improve consumers’ budget management, to prevent over-indebtedness by providing solutions as soon as possible to consumers in financial difficulties (FR).

6.Provision of consumer support by consumer organisations (SE); customer service centre and call centre processing written consumer claims and providing information (HU); free legal advice both online and by phone by some organisations (CZ).

As part of the continuous effort to ensure that rules are fit for purpose, the Commission launched in November 2021 an open public consultation 325 on the MCD review, to gather evidence on the MCD’s functioning. The consultation included, among others, a question on Article 6 of the Directive and its effectiveness in increasing the financial education of consumers (Question 10). The results showed that:

1.35.9% of the respondents considered that Article 6 has been effective in increasing the financial education of consumers. The majority of them were industry representatives (companies/business organisations and associations). Several considered that Article 6 promoted financial literacy and encouraged Member States to be more active in this area. Notably, a few, mentioned that the exact impact of Article 6 would be difficult to assess.

2.33.3% of the respondents (mixed stakeholders) considered that Article 6 has not been effective in increasing the financial education of consumers. Among them, several stressed that there was no significant evidence of the impact of Article 6 on financial literacy programs/initiatives in Member States and highlighted the general lack of financial education among the population.

3.30.8% of the respondents did not know or did not answer.

While a majority of respondents agreed with a positive impact of Article 6 MCD, some respondents struggled with providing a positive response, the main reason being the difficulty to demonstrate causality between this provision and the national financial education measures that were taken as a consequence. This is because some Member States were already rather active in this field and proactively took measures seeking to increase the level of financial education of their citizens. At the same time, financial education has not been (at least originally, i.e. at the time of the adoption of MCD) on the political agenda of all Member States and the explicit provision in MCD could have triggered action from those Member States that were not planning (and hence would not have put forward) any actions on their own. Furthermore, it can be assumed that the specific focus on responsible borrowing ensured that those Member States that were already planning their financial education campaigns, ensured that due attention was paid to this specific aspect of financial education.

On this basis, it can be concluded that the Article 6 MCD has had a positive impact at least in some Member States. It should therefore be considered as a relevant supporting measure to provide equal incentives for all Member States to work towards promoting initiatives related to the financial literacy of their citizens.

The below assessment is based on the presumption that creating such incentives is better than taking no action at all at EU level, as the latter case would leave taking any action entirely to the choice of Member States, which may have different schedules and objectives in their national financial education strategies. This is without prejudice and fully respecting to the principle that Member States have legal competence in the matters related to financial education and that the European Union (as per Article 165 of the Treaty on the Functioning of the EU) can only contribute to developing quality education by encouraging cooperation between EU countries, and supporting and supplementing their action. Increasing the level of financial literacy can be considered as a key complement to financial consumer protection policy, as enshrined in Article 169 TFEU. 326

1.Identification of “other relevant sectoral legislation” and scope

This section frames the policy options set out in the next section. It discards upfront the solutions that would be too costly and inefficient. It allows to focus then on the options that are credible and most efficient in dealing with the identified problem.