Explanatory Memorandum to COM(2012)352 - Key information documents for investment products - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2012)352 - Key information documents for investment products. |
|---|---|
| source | COM(2012)352  |
| date | 03-07-2012 |
This proposal is about improving transparency in the investment market for retail investors.
Retail investment products – which include investment funds, retail structured products and certain types of insurance contracts used for investment purposes – are essential for meeting the needs of EU citizens for products with which to build up savings and investments, whilst also contributing to efficient capital markets that help fund EU economic growth.
However, asymmetries of information about investment products exist between retail investors and those designing such products and seeking to sell them to these investors. Retail investors are not thereby well equipped in protecting their own best interests. Such investors often face confusing and overly-complex information about possible investments, where risks and costs of products are difficult to assess or compare. This undermines the efficiency of the investment markets, leading to higher prices for investors. It also contributes directly to the purchase of unsuitable products by retail investors, leading to detriment to these investors either through unexpected costs or losses, missed opportunities, or, in the worst case, through the loss of life savings with a dramatic impact on individual and family wellbeing.
Existing disclosures vary according to the legal form a product takes, rather than its economic nature or the risks it raises for retail investors. The comparability, comprehensibility and presentation of information vary, so the average investor can struggle to make necessary comparisons between products. Indeed, product disclosures are often focused more on reducing legal risks for the manufacturer rather than providing effective, open and balanced communication to potential customers about the product in a form that the customer is likely to understand and use. Information – other than marketing – is typically overly lengthy and does not sufficiently highlight key points or information.
The importance of addressing these issues has been underlined by the financial crisis. Retail investors have lost money with investments that carried risks that were not transparent or understood by those investors. In addition, retail investment products including retail structured products or insurance contracts for investment purposes often have been and continue to be marketed to retail investors as substitutes for simple products such as savings accounts although retail investors do not necessarily understand the differences. This is in a context where investor confidence has collapsed: a recent survey of consumers across the EU showed they trust the financial services less than all other industry sectors.
Rebuilding confidence on a sound basis is vital. Improving provisions on transparency so that they work in favour or retail investors, taking into account their needs is a vital component of this.
The EU has already taken innovative steps through the development of the UCITS key investor information document (UCITS KIID). It was developed in a new way, on the basis of robust testing of disclosure approaches with retail investors themselves, to shorten, streamline and focus information provided to the greatest extent possible and ensure the information is comprehensible for the average retail investor.
While disclosures for UCITS have therefore already been improved, those for the wider range of retail investment products have not. The task now is to address all such products: European retail investors should always receive short, comparable and standardised disclosures, termed key information documents or KIDs in this explanatory memorandum, whatever the investment product they are considering.
The genesis of this proposal for an EU-wide KID is a request from the ECOFIN Council in May 2007 for the European Commission to examine the coherence of EU law applying to different types of retail investment products.
A first stage of work culminated in the adoption by the Commission in April 2009 of a Communication on Packaged Retail Investment Products (PRIPs). The Commission concluded in the Communication that a sustainable and satisfactory regulatory environment for the sale and disclosures of retail investment products can only be established through legislative change at the European level, since a lack of effective rules at the European level underpinned inconsistencies in practices across sectors. The Communication noted two areas of further work: rules applying to sales, and rules on product disclosures. This proposal stems from the latter work stream on product disclosures.
The proposal takes the form of a Regulation, which will be supported by detailed delegated/implementing acts. This Regulation sets the overall principles on the approach and content. The propsed delegated/implementing acts would standardise the presentation of the information required by this Regulation as far as possible, however they would adapt measures as necessary for the specific features of other retail investment products and their differing risk profiles, to ensure that retail customers always receive the key information they need to take informed decisions. These detailed measures will ultimately form a package with the proposed Regulation. They will have an impact on the overall costs which are related to the introduction of the KID and so options for these detailed measures will themselves be subject to a thorough impact assessment.
This proposal forms part of a wider legislative package dedicated to rebuilding consumer trust in financial markets. The package has two other parts. The first is an extensive overhaul of the Insurance Mediation Directive 2002/92/EC (IMD) to ensure that customers benefit from a high level of protection when buying insurance products. The final part of the package aims at strengthening the function of the depositary for UCITS – a key building block for investor protection provided for by the UCITS Directive. To ensure the continued effectiveness of this building block, targeted amendments are proposed to Directive 2009/65/EC.
The measures on product disclosure proposed in this Regulation in particular complement investor protection measures on investment advice and sales services. As far as the sales of structured deposits are concerned these have been addressed by the proposal for a Directive of the European Parliament and of the Council on markets in financial instruments repealing Directive 2004/39/EC.[1] The revision of the IMD will specifically deal with the improvement of the sales rules for investment insurance products.
Contents
- Results of consultations with the interested parties and impact assessments
- LEGAL ELEMENTS OF THE PROPOSAL
- BUDGETARY IMPLICATION
- 3.1. Legal basis
- 3.2. Subsidiarity and proportionality
- 3.3. Compliance with Articles 290 and 291 TFEU
- 3.4. Detailed explanation of the proposal
- 3.4.1. Investment products which should be accompanied by a KID when sold to retail investors
- 3.4.2. Responsibility to produce the KID - Article 5
- 3.4.3. Form and content of KID - Articles 6 to 11
- 3.4.8. Interaction with other Union law targeting the provision of information to consumers
The initiative is the result of an extensive dialogue and consultation with all interested stakeholders.
There have been two phases of such consultations: the first followed the Council request and preceded the publication of the Commission Communication in 2009. It included a written call for evidence in October 2007, a Feedback Statement in March 2008, a technical workshop was held with industry representatives in May 2008, and a high-level Open Hearing in July 2008. The second phase of consultation was more focussed on concrete elements of the work stream on disclosure, and followed the Communication: a further technical workshop was held in October 2009, and an Update on the work was published in December 2009.
In parallel to these efforts the three Level 3 Committees of national supervisors (CEBS, CEIOPS and CESR) worked together to develop their thinking on this subject. The first output was the joint submission to the Commission of three sectoral reports on 18 November 2009. Recognising the cross-sectoral nature of this workstream, a joint Level 3 Task Force on PRIPs was established in 2009 and one year later it submitted to the Commission its Final Report.
The Commission launched a public consultation on concrete options in November 2010. The Commission received around 140 contributions which have been published on the Commission website. Responses to this consultation showed support across industry, consumer and Member State stakeholders for the initiative and the broad approach proposed. Differences of view focused mostly on the calibration of the scope of the regime, and the extent to which the UCITS key investor information approach might be copied for other retail investments.
These consultations have been supplemented by a series of discussions with consumer representatives (FIN-USE, Financial Services Consumer Group, and Financial Services User Group), regulators (Financial Services Committee, European Securities Committee, European Insurance and Occupational Pensions Committee) and industry representatives.
This proposal builds on the work undertaken by the three Level 3 Committees (CEBS, CEIOPS and CESR[2]); opinions expressed during consultations, including workshops, meetings with stakeholders, as well as on the experience with the key investor information regime which has been developed for UCITS.
In line with its 'Better Regulation' policy, the Commission prepared an impact assessment of policy alternatives. Policy options related to the scope of the new regime, level of standardisation, who should be held responsible for producing of the disclosure, and how to ensure its effective provision to retail investors. A number of studies, including an innovative study focused on behavioural insights related to retail investors, supported this impact assessment work.
The draft impact assessment report was examined by the Impact Assessment Board, and revised in line with its positive opinion of 15 April 2011. Amongst other improvements, the interaction between the proposal and other measures on investor protection, including those on selling practices was further clarified, the concrete scope of products and entities impacted by the proposal made clearer, the possible interaction of the proposals with other areas of Union law clarified further, the analysis of options deepened and extended, and the cost and benefit estimates were more clearly adjusted to reflect steps already taken for UCITS. In addition, the analysis of the other factors relevant for investor decision making was deepened to reflect more explicitly that investor disclosures are only one such factor, and that the role of advisors or sellers can be predominant in determining or influencing investor choices in many practical sales environments.
This proposal is based on Article 114 of the TFEU. It lays down uniform rules on investment product disclosures for retail investors. It aims to ensure that retail investors are able to understand the key features and risks of retail investment products and to compare the features of different products. At the same time it also aims to ensure a level playing field between different investment product manufacturers and those selling those products. It aims therefore to establish uniform conditions for the way investors in the Union are informed about investment products by the means of a short document and how the information is provided to them. This proposal therefore harmonises the operating conditions in relation to the information on investment products for all relevant players in the retail investment market, product manufacturers, persons selling and investors.
Different rules that vary according to the industry that offers the investment products and national regulation in this area create an un-level playing field between different products and distribution channels, erecting additional barriers to a Single Market in financial services and products. Member States have already taken divergent and uncoordinated action to address shortcomings in investor protection measures and it is likely that this development would continue. There is increasingly cross border trade in retail investment products, but divergent national approaches will lead to different levels of investor protection, increased costs and uncertainties for product providers and distributors which represent an impediment to the further cross-border development of the retail investment market. Such further development would also require easy comparisons between products of different types across the Union. Divergent standards to investor disclosure make such comparisons very difficult. Such different rules could obstruct the fundamental freedoms and thus have a direct effect on the functioning of the internal market. Experience in the field of UCITS also suggests that different national approaches to disclosures can cause significant distortions of competition. Consequently, the appropriate legal basis is Article 114 TFEU.
It is considered appropriate and necessary for this proposal to take the form of a regulation, so that this initiative can serve its purpose. This measure is only dedicated to retail investor disclosures. It does not address other rights or obligations of product manufacturers, persons selling investment products or investors where a Directive might be the appropriate legal form. Experience has shown that if a product disclosure is to contain standardized information enabling investors to compare between different investment products, this can only be achieved by directly applicable provisions which do not require Member States to take any additional implementing measures. If requirements on the content and the form of disclosure diverged from one Member State to another as a result of the transposition of a Directive, it would create an unlevel playing field for market participants and an uneven level of investor protection. It is important that this regulation impose direct obligations on private parties as regards the preparation or the provision of the disclosure and the scope of these obligations should not depend on national implementing measures.
According to the principle of subsidiarity laid down in Article 5(3) of the TEU, action on the EU level should be taken only when the aims envisaged cannot be achieved sufficiently by Member States alone and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the EU.
The aims of this proposal, to ensure a level playing field across the EU among different product manufacturers and persons selling investment products and to establish a uniform level of investor protection by laying down harmonised rules on transparency cannot be achieved by action taken at Member State level. National approaches may have a beneficial impact with respect to investor protection within the Member States in question. But national approaches are by definition restricted to the relevant national territory. Furthermore, there is the risk of divergent approaches to investor disclosures. They cannot create a Union wide level playing field for investment product manufacturers and persons selling and an even level of investor protection in relation to investor disclosures across the EU. Therefore, action on the European level is needed.
In accordance with the principle of proportionality (Article 5 i TEU), it is necessary and appropriate for the achievement of the objectives of this initiative to lay down principles relating to the content and form of the disclosure for retail investment products, as well as rules on drawing up and provision of these disclosures to retail investors. Such requirements should be further developed at level 2, so that a requisite level of consistency in measures can be achieved to facilitate comparisons between investment products that originated in different industry sectors.
Since 1st January 2011 the Regulations establishing the three European supervisory authorities EBA, EIOPA, and ESMA are applicable.[3] In this respect the Commission wishes to recall the Statements in relation to Articles 290 and 291 TFEU it made at the adoption of the Regulations which took place on the 23rd September 2009 according to which: 'As regards the process for the adoption of regulatory standards, the Commission emphasises the unique character of the financial services sector, following from the Lamfalussy structure and explicitly recognised in Declaration 39 to the TFEU. However, the Commission has serious doubts whether the restrictions on its role when adopting delegated acts and implementing measures are in line with Articles 290 and 291 TFEU.'
Investment products can be manufactured to take different legal forms, so that the same investment proposition is offered across different industry sectors. This manufacturing can give the impression that the products are quite different, even where underlying economic purposes are similar (e.g. a fund, a deposit and a unit-linked insurance contract might look very different, but might be equally used to deliver the same investment proposition). All of these products seek to address a relatively simple need: capital accumulation that beats the risk-free rate. While these products vary in what they offer – some combine the prospect of capital accumulation with a capital guarantee, while others do not; some combine an investment element with another element (such as offering life insurance benefits) – they are all sold to retail investors when they approach financial intermediaries or product manufacturers directly for products that address capital accumulation needs.
Such investment products expose the investor to fluctuations in the market value of assets or in the payouts to be achieved from assets. But this exposure is not of the direct kind, as for instance when an investor buys specific assets themselves. Instead these products and those that manufacture them intercede between the investor and the markets, through a combination of wrapping of those assets, or other mechanisms that differ from a direct holding ("packaging"). Such mechanisms can include techniques such as pooling capital from multiple investors to enable collective investments, or engineering exposures through the use of derivative instruments. These techniques can create additional complexity, costs and opacity in relation to the product. They can also, however, allow for risk spreading and other benefits that would not be available to the investor on their own; they allow ordinary investors to participate in investment markets more efficiently, leading to deeper capital markets and better options for investors seeking to diversify their investment exposures. To capture all such products, the definition of investment products in this Regulation refers directly to this packaged form. The Commission Communication of April 2009 referred specifically to packaged retail investment products, or PRIPs; following consultations, this Regulation operationalizes this focus on packaged investments through a reference to the indirectness of holdings of assets.
Such a definition would include products with capital guarantees, and those where, in addition to capital, a proportion of the return is also guaranteed; investment funds, whether closed-ended or open-ended including UCITS; all structured products, whatever their form (e.g. packaged as insurance policies, funds, securities or banking products), insurance products whose surrender values are determined indirectly by returns on the insurance companies own investments or even the profitability of the insurance company itself as well as derivative instruments. Some of these products may be used as individual retail pension products, i.e. accumulation vehicles for the purposes of retirement planning.
As a result of such a definition, the following products are not covered by this Regulation:
- products where the precise rate of return is set in advance for the entire life of the product, since here the amount payable is not subject to fluctuations in the values of other assets (there is no investment risk);
- plain shares and bonds, insofar as these do not contain a mechanism other than a direct holding of the relevant assets;
- deposits which are not structured, i.e. deposits which are determined by an interest rate such as e.g. EURIBOR or LIBOR;
- insurance products that only offer insurance benefits, such as pure protection insurance products or non-life insurance products, which provide no surrender value that is exposed to fluctuations in the performance of one or more underlying assets or reference values.
- occupational pension schemes covered by Directive 2003/41/EC or Directive 2009/138/EC.
- pension products for which a financial contribution from the employer is required by national law and where the employee has no choice as to the pension product provider.
The mechanisms by which payouts are made would not be relevant for determining scope: products that yield an income, or provide a single pay out at maturity, or that adopt some other arrangement, would all be in scope in so far as they satisfy the general definition.
The definition does not include any reference to a product being intended for retail use, even though many investment products are designed with retail customers already in mind. This is due to the fact that the retail element may only be determined at the point of sale, when the distributor sells a certain investment product to a retail customer, or provides advice on it. However, the disclosure would need to be produced whenever a product that falls within scope is to be sold to retail investors.
The proposal expressly allocates the responsibility for preparing the KID to the investment product manufacturer, within the meaning of the Regulation: which means a person who produces an investment product but also a person who has substantively changed the risk or cost structure of an existing investment product. (An entity combining other products would be a product manufacturer). This definition captures a situation where the original manufacturer of a particular financial product does not exercise control over the final product. Not every change to the original product triggers such a shift of responsibility. However, changes which significantly alter key features of the investment product such as its risk reward profile or its costs shall be considered as remanufacturing the product as clarified in Article 4. Delegation of the preparation of a part or the whole disclosure to third parties, such as may occur under collaboration with distributors, has no impact on the overall responsibility of the product manufacturer with regard to the KID.
This proposal introduces the principles of the UCITS KIID regime across all other retail investment products – all KIDs should have a standardized look and feel and contents designed to keep them focused on key information presented in a common way, so as to promote comparability of information and its comprehension by retail investors.
The KID should be seen as an opportunity to communicate effectively with potential investors in a plain manner. Therefore the proposal provides clear indications in relation to its form and language: it must be a short document, written in a concise manner, in non-technical language that avoids jargon, so as to be understandable by the average or typical retail investor, drawn up in a common format so that investors are able to easily compare between different investment products. The KID should be a stand-alone document in the sense that retail investors should not be required to read other documents to be able to understand the key features of the investment product and take an informed investment decision, and it should be clearly distinct from marketing materials.
The proposal specifies the essential elements of the investment product which should be described in the KID: the identity of the product and its manufacturer, the nature and the main features of the product, including whether the investor's might lose capital, its risk and reward profile, costs, and past performance as appropriate. Other information may be included for specific products, and information about possible future outcomes should be provided for private pension products. The proposal sets out a common format and sequence of sections to promote comparability. It is of central importance that the information included in the document is kept to a minimum, as otherwise the document will become too complicated for the retail investor. In order to maintain its short form, no other information should be included in the KID.
These requirements should be supported by delegated acts and supporting methodologies for calculating summary disclosures of risks and costs specified in technical standards. Such an approach would allow for a maximal level of consistency and comparability of disclosures consistent with the variety of products that fall under the scope of the regime. It is envisaged that additional supporting initiatives could substantially contribute to the success of this initiative, for instance, development of common glossaries of terms or sharing of best practices in use of plain language.
The proposal outlines in addition measures on keeping the KID up to date and on ensuring appropriate references in accompanying marketing information.
The proposal clarifies the liability of the investment product manufacturer on the basis of the KID and the burden of proof in this regard: it is for the product manufacturer to show that they have complied with the Regulation when a retail investor makes a claim.
3.4.4. Obligation to provide the KID – Articles 12 to 13
The proposal requires the KID to be provided to retail investors (rather than simply offered). Whoever is selling the product to retail investors (whether a distributor or the product manufacturer in case of direct sales) must provide the disclosure to the potential investor in good time before a sale is transacted. The timing of provision is vital; to be effective the document must be provided before an investment decision is taken. However, the proposed Regulation provides for some flexibility as regards the timing of provision for certain forms of distribution that are not face-to-face. Also, the proposal includes requirements on the media used for providing the KID to retail investors, including conditions designed to allow for media other than paper. These requirements aim to ensure the appropriateness of these media to the sale and the continued access of the retail investor to the information in the future. To achieve consistent outcomes, details of the method, timing and conditions for the provision of the disclosure to a retail investor will be clarified by delegated acts.
3.4.5. Complaints, redress and cooperation – Articles 14 to 17
This proposal includes measures to ensure effective complaints procedures both on the part of the investment product manufacturer and at the level of Member States. In addition, it includes measures to ensure effective access to dispute resolution procedures and redress.
The cross-sectoral character of this proposal, which includes banking, insurance, securities and fund products, requires enhanced and efficient co-operation between competent authorities in all sectors.
3.4.6. Administrative sanctions and measures – Articles 18 to 22
The Commission Communication on sanctions i confirmed that ensuring proper application of EU rules is first and foremost the task of national authorities, who have the responsibility to prevent financial institutions from violating EU rules, and to sanction violations within their jurisdiction, but stressed at the same time the co-ordinated and integrated way in which national authorities should act.
In line with the Communication and following other initiatives at EU level in the financial sector, this proposal contains provisions on sanctions and measures aimed at introducing a harmonised approach to sanctions in order to ensure consistency. It is important that administrative sanctions and measures are applied where key provisions of this proposal are not complied with and that those sanctions and measures are effective, proportionate and dissuasive.
3.4.7. Transitional provision for UCITS and review clause – Articles 23 to 25
Given the recent introduction of the KIID for UCITS, it would not be proportionate to apply the KID requirements of this Regulation to UCITS at this stage. For this reason, a transitional provision is included to allow UCITS to continue to use the KIID in accordance with Directive 2009/65/EC for five years from the entry into force of this Regulation.
At that point, the Commission would be able to assess how UCITS should be treated and whether and if so how the existing UCITS KIID should be amended so as to achieve the greatest possible degree of comparability of information between UCITS and other investment products subject to the KID under this regulation. Other than identifying possible adjustments to the content of the UCITS KIID, several options are conceivable for delivering these adjustments in a proportionate way. One option would be to prolong the transitional arrangement of this Regulation, so that UCITS would continue to be only subject to the requirements in Directive 2009/65/EC – though these requirements could be adjusted to ensure comparability of information. Another option would be to amend Directive 2009/65/EC by repealing the provisions on the UCITS KIID, moving the substantive rules on the disclosure for UCITS to this Regulation. A final option would be to leave the substantive rules on the UCITS KIID in the UCITS framework, but to establish that this document is equivalent to the PRIPs KID under this Regulation. The assessment of options could include, where necessary, the identification of any changes to the KID in this Regulation that may be necessary.
This Regulation foresees a review of the effectiveness of its measures after four years. This is timed prior to the end of the transitional period just mentioned so that conclusions can already be drawn on the appropriate treatment of UCITS. The review should also consider whether or not the scope of the Regulation should be broadened further to cover new or innovative investment products being offered in the Union.
In relation to other disclosure requirements in Union law, it should be noted that the KID required under this Regulation is a new disclosure document which will be designed in a way which is exclusively tailored, in terms of its contents and design, to the needs of ordinary retail investors when considering and comparing different investment products prior to an investment. Its design and its purpose are therefore not fully identical with other disclosure requirements such as the summary under the Prospectus Directive or disclosure requirements under Solvency II. These disclosures seek to fulfil purposes in addition to the delivery of key information to retail investors, such as ensuring transparency towards financial markets or a full picture of all details in relation to a proposed contract. Therefore, the KID cannot easily replace these other requirements and will exist in parallel to these requirements. However, the experience with the requirements of this Regulation will show whether in practice the KID requirements should be further developed, for instance so as to replace certain disclosures required under other Union law.
In addition, the KID requirements exist in parallel to the requirements of the Directive on distance marketing of consumer financial services (DMFSD) and the e-commerce Directive. The requirements of the DMFSD are service related and the requirements of the e-commerce Directive are supplementary to other information requirements under Union law. Therefore, this Regulation will not impact those Directives.
There are no implications for the EU budget in that no additional funding and no additional posts will be required to perform these tasks. The tasks envisaged for the European Supervisory Authorities fall within the scope of existing responsibilities for these Authorities, therefore the allocation of resources and staff foreseen in the approved Legislative Financial Statements for these Authorities will be sufficient to facilitate the execution of these tasks.