Navigating the Retail Investment Strategy Directive

Introduction

The European legislator is currently considering a compelling package of new measures that aim to amend several key EU directives concerning investor protection. On May 24, 2023, the European Commission unveiled a set of new rules, including a proposal for a Directive on the protection of retail investors, known as the “Retail Investment Strategy Directive” (RISD). Although the approval of these measures is not anticipated before 2025, their potential impact is already generating significant interest.

Once enacted, the RISD is expected to bring substantial amendments to the primary existing directives governing investment services and products, such as investment funds and insurance investment products. This includes notable changes to Directive 2014/65/EU (“MiFID II”) and the EU regulation on pre-packaged investment and insurance products for retail investors. The RISD represents a pivotal regulatory advancement designed to enhance investor protection and market efficiency.

By focusing on key areas such as transparency, conflicts of interest, costs, and marketing information, the RISD aims to foster a more equitable investment environment for retail investors. This forward-looking initiative underscores the EU’s commitment to creating a robust framework that safeguards investors while promoting a fair and efficient market.

Enhanced disclosure requirements

One of the cornerstone elements of the RISD is the emphasis on transparency. Financial institutions are now mandated to provide clear, concise, and comprehensive information about investment products. This includes detailed disclosures on fees, risks, and potential returns, including through standardized information, enabling investors to make more informed decisions.

Conflict of interests 

The RISD aims to further regulate inducements in order to lower the risk of conflict of interest. While the Commission had initially introduced a strict ban on the receipt of inducements for the provision of executive investment services not accompanied by investment advice (i.e. reception and transmission of orders and order execution), the current proposal seems to lack such an express prohibition. However, the receipt of inducements remains subject to the client’s best interest.

Costs

The Commission’s proposal required products manufacturers to adopt appropriate product governance processes to verify that the cost of financial products is justified and proportionate having regard to the characteristics, objectives, strategies, and performance to ensure that the costs and benefits of investment products are fair to retail investors. The current proposal confirms this general approach; however, while the Commission’s initial text imposed an obligation on manufacturers to align with the cost benchmarks developed by ESMA (and EIOPA for insurance products) for product categories, thus substantially imposing a “fixed” price for financial products, the current text stipulates that the criteria developed by ESMA and EIOPA are only supervisory tools for the authorities and therefore are not directly binding on manufacturers.

Stricter suitability assessments

The RISD introduces more rigorous suitability assessments to ensure that investment products align with the investor’s risk tolerance, financial situation, and investment objectives.

Improved product governance

The RISD also focuses on enhancing product governance frameworks. This involves the development and distribution of investment products that are designed with the best interests of retail investors in mind. Financial institutions must implement robust processes to monitor and review product performance, ensuring ongoing suitability and compliance.

Conclusion

The RISD marks a pivotal step towards enhancing investor protection and market efficiency. By focusing on transparency, suitability, and product governance, the RISD aims to create a more equitable investment environment for retail investors. As the directive takes effect, firms should familiarize themselves with the RISD’s provisions to understand how they impact their internal procedures. This includes internal arrangements related to client disclosure requirements, suitability assessments, and product governance standards.

The above summary is based on the current proposal text of the RISD. It will be important to see the final version of the directive once approved to confirm some important points that could materially change the regime and compliance obligations for firms.