On 24 May 2023, the European Commission published a new proposed legislative package regarding its Retail Investment Strategy (RIS). The package is wide-ranging in scope and touches on the entire investment journey of the consumer. Investor protection rules are set out across sector specific regulation, including the Markets in Financial Instruments Directive (MiFID II), the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation, the Undertaking for Collective Investment in Transferable Securities (UCITS) Directive, the Alternative Investment Fund Managers Directive (AIFMD), the Insurance Distribution Directive (IDD), and the taking-up and pursuit of the business of Insurance and Reinsurance Directive (Solvency II).

For example, the proposal aims to strengthen the pricing process for UCITS management companies and AIFMs, by introducing value for money rules, as well as clarifying what costs are due, in the UCITS Directive and the AIFMD respectively. Rules on value for money are applicable to UCITS, but also to AIFs that are marketed to retail investors.

Provisions on undue costs are currently included in Level 2 of the UCITS Directive and the AIFMD, and in ESMA's Level 3 provisions. However, ESMA has highlighted the lack of convergence in the area of undue costs due to the lack of a clear definition and clear empowerment at Level 1 for Level 2 work. Therefore, the proposed revisions to the UCITS Directive and AIFMD will define the conditions for considering that costs are due and provide rules in the pricing process to ensure that these conditions are met.

The package also gives a mandate to ESMA and EIOPA to develop, make publicly available, and regularly update cost and performance benchmarks against which the manufacturers and distributors must compare their products prior to offering them on the market. To facilitate the development of benchmarks, reporting obligations for manufacturers, distributors and national competent authorities towards ESMA and EIOPA are introduced, in MIFID, the IDD, the UCITS Directive and AIFMD.

A new Article 24b is proposed in MiFID which deals exclusively with investment firms’ regulatory disclosures on costs, associated charges and payments made by third parties. Article 24b prescribes a standardised presentation of such information on costs, associated charges and third-party payments. It also requires, specifically on third-party payments, an explanation of their purpose and quantification of their impact on expected returns, in a standardised and comprehensible way. It notes that investment firms providing investment services to professional clients shall have the right to agree to a limited application of the detailed requirements, with such clients. However, investment firms shall not be allowed to agree such limitations when the services of investment advice or portfolio management are provided or when, irrespective of the investment service provided, the financial instruments concerned embed a derivative. Investment firms providing investment services to eligible counterparties shall have the right to agree to a limited application of the detailed requirements, except when, irrespective of the investment service provided, the financial instruments concerned embed a derivative and the eligible counterparty intends to offer them to its clients.

A new definition for ”marketing communication” is proposed which includes disclosure of information other than those required by EU and member state law (e.g., not UK or US law) or which are financial education materials or investment research that directly or indirectly promote or entice investment in financial instruments or the use of investment or ancillary services made by the investment firm or a third party on its behalf. This is not confined to communications between a firm and its MiFID client and could be applicable in a range of circumstances. MiFID firms must have a marketing communications policy, approved and overseen by the management body and effective governance arrangements with a view to taking all reasonable steps to ensure marketing communications and practices comply with the relevant requirements. In addition, the proposed changes set out the respective responsibilities of manufacturers and distributors. New reporting and record-keeping requirements will also apply.

A new Article 24a is proposed in MiFID which covers the obligations of investment firms in relation to the payment of inducements. The existing exemptions to the bans on inducements would continue to be applicable to the proposed ban on inducements for execution-only services (e.g. payments or benefits which enable or are necessary for the provision of investment services, payments in relation to research, etc.). Furthermore, as investment advice may be combined with the services of execution of orders and reception and transmission of orders, with the main service being investment advice, Article 24a clarifies that the ban on inducements in relation to the services of execution of orders and reception and transmission of orders is not applicable to situations where investment firms provide advice to the same client relating to one or more transactions covered by that advice. The ban on inducements is also not applicable in relation to fees or remuneration received or paid from an issuer for placement and underwriting services.

The proposal amends Annex II of MiFID, which contains the identification criteria for clients who may be treated as professional on request. The amendments include a reduction of the wealth criterion from €500,000 to €250,000, and the insertion of a possible fourth criterion relating to relevant education or training. The amendments also create the possibility for legal entities to qualify as professional on request by fulfilling certain balance sheet, net turnover and own funds criteria.

Please contact James Delaney or Danny O'Connell with any questions regarding these proposals.

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  James Delaney

  Managing Director, Asset Management Regulation

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  Danny O'Connell

  Director, EU and International Regulatory and Tax Policy