2023/0167/COD: 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

A new proposed „omnibus“ directive as regards modifications to various directives, including the UCITS Directive, the Solvency II Directive, the Alternative Investment Fund Managers Directive (AIFMD), the Markets in Financial Instruments Directive II (MiFID II), and the Insurance Distribution Directive (IDD), was published in the Official Journal (OJ) of the EU. The overall objective of the proposed „omnibus“ directive is to implement targeted measures to bring about higher retail investor participation in the EU financial market while maintaining or even improving standards for the protection of such investors. A second subsidiary objective is the alignment of provisions within all involved directives.
#### The key proposed measures can be classified as follows and contain the following key modifications:
(1) measures to improve disclosures made to investors to enhance transparency, simplify the disclosures, and enhance understanding: The proposed directive would
– modify both MiFID II and the IDD to require the disclosure of risk warnings in any retail communication involving „particularly risky products“.
– modify MiFID II and the IDD to require investment firms and firms engaged in the distribution of insurance-based investment products to adhere to a standardized form to be developed by ESMA and EIOPA for the presentation of any costs related to a product, including associated charges, and third-party payments and
– require same firms to provide an explanation of „associated charges“ and „third-party payments“ and the expected impacts of such charges or payments on the return of investment.
– modify the IDD and MiFID II to require the provision of an annual statement to retail clients which would include information on all cost and charges and the performance of the product.
(2) measures to protect retail investors from misleading or insufficient marketing communications: The proposed directive would
– insert new articles in the IDD and in MiFID II to require that all marketing communications clearly present the essential characteristics of the investment product or service and that each marketing communication can be clearly identified as such.
– modify MiFID II to require investment firms engaged in the manufacturing of investment products that they have suitable distribution strategies for each product (suitability of target market, suitability of marketing communication, suitability of marketing practices).
– modify MiFID II to require each investment firm to have policies and procedures in place as regards marketing communication and practices. Such policies must be defined, approved, and overseen by the management body of a firm.
– modify both MiFID II and the IDD to extend the recordkeeping obligations of distributors to require the retention of marketing communications for a period of 5 years (up to possible 7 years at the request of a competent authority).
(3) measures to implement safeguards to prevent biased financial advice: The proposed directive would
– amend MiFID II and the IDD to prohibit the payment of inducements on order execution sales (no financial advice is involved) by the product manufacturer to the distributor for the reception or transmission of orders or the execution of such.
– amend MiFID II and the IDD to require that the payment of inducements in cases of advised sales does not impair the ability of distributors to comply with their duty to „act honestly, fairly and professionally in accordance with the best interest of their clients and to disclose the existence, nature and amount of inducements to the clients“.
– amend MiFID II and the IDD to introduce a new test to assess that investment firms, insurance undertakings, and insurance intermediaries act in the best interest of customers. The test would replace the existing quality enhancement test in MiFID and the no detriment’ test in the IDD and would oblige firms to
– „base their advice on an assessment of an appropriate range of financial products;
– recommend the most cost-efficient financial product from the range of suitable products“; and
– offer at least one product with no additional features that would still satisfy the needs of the customer so as to provide at least one low-cost alternative to clients.
(4) measures to enhance product governance requirements to ensure that products offered to retail clients deliver Value for Money: In this context, MiFID II, the IDD, the AIFMD, and the UCITS Directive would be amended to
– require product manufacturers to establish a „pricing process“ which would permit the identification and quantification of all costs and charges associated with a product and the assessment as to whether or not the product delivers a value for customers (changes to MiFID II and the IDD).
– only permit PRIIPs products to be approved that meet prescribed performance and cost benchmarks. In this context it shall be noted that ESMA and EIOPA would be required to establish and disclose such benchmarks based on data that would have to be furnished by product manufacturers on a regular basis, including data on product costs, charges, and performance. Similar requirements would be introduced for UCITS and AIFs. To ensure centralized administration and reporting of all costs, a product manufacturer would be responsible to include ALL costs along the value chain in the cost assessment of its product. Accordingly, firms engaged in the distribution of products would be required to inform product manufacturers of additional costs relating to any one product.
Additionally, the UCITS Directive and the AIFMD would be amended to include provisions on undue costs, including a clear definition of such and the criteria for the assessment of whether or not the costs of UCITS or AIFs can considered to be „due“ or „undue“ (e.g. the costs are in line with those disclosed in the prospectus, the costs are necessary to operate a fund in accordance with its strategy).
(5) measures to improve suitability and appropriateness assessments: In order to enhance the effectiveness of such assessments, the proposed directive would
– modify both the IDD and MiFID II to require investment firms, insurance undertakings, and firms engaged in the distribution of insurance-based investment products to explain to customers the purpose of such assessments in a „clear and simple way“ and to furnish a warning to customers as regards the retention of important information to derive an appropriate assessment and the potential consequences of such retention or misinformation.
– modify the IDD and MiFID II to require the consideration of portfolio diversification in the suitability assessment.
– modify the IDD and MiFID II to require information as to an investor’s capacity to bear losses and his risk tolerance in the appropriateness assessment.
– modify the IDD and MiFID II to introduce provisions specifically for simple, non-complex, and well-diversified products which would only require a limited assessment of suitability excluding assessment factors such as knowledge of the product or product experience.
—————–
The proposed directive would also introduce new measures to improve the professional standards of individuals providing advice to customers (e.g. by stipulating minimum requirement for ongoing professional training) and would reduce the threshold for being treated as a professional investor from EUR 500 000 to EUR 250 000 for individuals and include new criteria for legal entities to qualify as professional investors based on net turnover, own funds, and certain balance sheet items.
Please note: as these are only the key proposed measures, please review the entire document for more detailed, comprehensive information.