European Commission
Disclosure, inducements and suitability rules - European Commission publishes final report - 2 August 2022
The European Commission (the Commission) has published its final report, dated May 2022, on disclosure, inducements and suitability rules. The final report follows the Commission’s retail investors study, which aimed to feed into the development of the retail investment strategy announced for 2022, and which was conducted as part of the Capital Markets Union action plan. The retail investment strategy aims to respond to new challenges in the market, such as increasing digitalisation of investment advice and the use of digital distribution channels.
The final report sets out the study’s findings in individual chapters, with the findings analysed under the Commission’s Better Regulation Guidelines, published in November 2021, to understand whether the current legal framework is relevant, coherent and effective, as well as adding value for consumer protection. To achieve this, the methodology for the study was designed to capture the whole process of retail investor decision-making, to understand and analyse the investment environment for investors, including through an analysis of product costs and current practices in advice and product provision. The primary data collection focused on 15 EU Member States, selected to cover a wide range of situations regarding levels of take-up of retail investment products, market characteristics and geographical diversity.
Positive findings from the final report include:
- the availability of information documents is good and for the majority of products easy for investors to locate. Information documents are less easy to collect for some non-complex products, notably simple shares or bonds. However, there is no shortage of easily available digital information on these products;
- compliance of the information contained in such documents is strong;
- comparability of most information items is strong. The standardisation of risk indicators is highly relevant as it works as a common anchor for investors comparing products; and
- the advice that the study’s mystery shoppers received was aligned with their profiles and objectives.
Despite this, the final report also notes the following areas of concern regarding disclosure, inducements and suitability rules:
- while confident investors are at ease in making their own choices of products, potentially without advice, others are more reliant on advice and vulnerable in relation to advice that is not in their best interests;
- there is a tension between the objectives the EU legal framework aims to achieve. The templates and requirements aim for transparency, standardisation and comparability, but there is also an ambition for disclosure documents and advice services to be engaging, encourage investment and support optimal investor choice. This creates a high volume of disclosure information, which can overload investors and negatively affect the attention they pay to the disclosures and their subsequent investment choices;
- handing out information documents and undertaking suitability assessments and needs tests is required, but the legal framework does not define at which stage of the investment process this should be required. This results in inconsistencies in practice, whereby some distributors comply with the requirements at first contact with potential investors, while others delay this step until almost the end of the process;
- product characteristics have the strongest influence on the extent to which investors succeed in making the right investment choice;
- despite EU level rules on advice and inducements, in the majority of member states analysed there is no identified increase in the access to, and use of, independent advice; and
- there is no evidence of a declining use of inducements, except in the Netherlands which applies a ban.
The final report can be accessed via the webpage below.
Webpage
European Banking Authority
IFR - EBA publishes Final Report on Guidelines on liquidity requirements exemption - 29 July 2022
The European Banking Authority (EBA) has published its Final Report (EBA/GL/2022/10) on Guidelines on the liquidity requirements exemption for small and non-interconnected investment firms.
Under Article 43(1) of the IFR, small and non-interconnected investment firms that meet the conditions set out in Article 12(1) of the IFR may benefit from an exemption from liquidity requirements granted by their national competent authority (NCA). To ensure a harmonised application of the exemption, the Guidelines address three main topics:
- the sorts of investment services and activities which make an investment firm eligible for the exemption;
- the set of criteria to be assessed by an NCA before granting the exemption; and
- guidance for NCAs when granting and withdrawing the exemption.
The Guidelines apply from 29 September 2022.
EBA Final Report: Guidelines on the criteria for the exemption of investment firms from liquidity requirements in accordance with Article 43(4) of Regulation (EU) 2019/2033 (EBA/GL/2022/10)
Press release
Financial Conduct Authority
Financial promotion rules - FCA publishes Policy Statement (PS22/10) and Handbook rules for high-risk investments and firms approving financial promotions - 1 August 2022
The FCA has published a Policy Statement (PS22/10) on strengthening its financial promotion rules for high-risk investments. Appendix 1 to the Policy Statement sets out the draft Handbook Instrument that will make the proposed changes. The Policy Statement follows the FCA’s consultation paper (CP22/2) on the proposals, published in January 2022.
The FCA is making several targeted changes to the original proposals, with a view to avoiding certain negative unintended consequences identified by respondents. These include:
- clarifying that the FCA’s marketing restrictions do not generally apply to investments issued by local authorities;
- shortening the main risk warning for high-risk investments and allowing alternative risk warnings in peer-to-peer agreements and portfolios, and where the activity of the product issuer or provider could be covered by the Financial Services Compensation Scheme;
- exempting investment companies listed under Chapter 15 of the FCA’s Listing Rules that are caught by its marketing restrictions from the risk warning, risk summary and personalised risk warning requirements;
- exempting ‘shareholder benefits’;
- clarifying that the Direct Offer Financial Promotion (DOFP) rules relate to promotions which include a manner of response or includes a form by which any response may be made;
- clarifying that the 24-hour cooling off period starts from when the consumer requests to view the DOFP (for Restricted Mass Market Investments) or financial promotion (for Non-Mass Market Investments); and
- ensuring that consumers must wait at least 24 hours before undertaking the appropriateness test again from their second assessment onwards.
It is also extending the implementation period to six months (with the exception of the main risk warning rules, which must be implemented within four months).
The rules will not apply to cryptoasset promotions. The FCA will make final rules for cryptoasset promotions once the relevant legislation bringing certain cryptoassets into the scope of the financial promotion regime has been made by HM Treasury. The FCA currently expects to take a similar approach to cryptoassets as that taken for other high-risk investments.
The rules related to risk warnings for financial promotions of high-risk investments will take effect from 1 December 2022. All other rules will have effect from 1 February 2023.
FCA Policy Statement: Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions (PS22/10)
Webpage
Press release
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Long-Term Asset Fund - FCA publishes Consultation Paper (CP22/14) on broadening the retail distribution - 1 August 2022
The FCA has published a Consultation Paper (CP22/14) on proposals for broadening the retail distribution of the Long-Term Asset Fund (LTAF) to a wider group of retail investors and pension schemes. The LTAF is a new category of authorised open-ended fund and has been designed to enable investors to invest in long-term illiquid assets through an authorised fund vehicle. LTAF promotion is currently restricted to professional investors, certified and self-certified sophisticated investors, and certified high net worth individuals.
The FCA is now proposing to treat the LTAF as a Restricted Mass Market Investment, in line with its Policy Statement (PS22/10) on strengthening the FCA’s financial promotion rules for high-risk investments. The FCA’s proposals will also increase the amount of exposure that some other authorised retail funds, including Funds of Alternative Investment Funds, can have to the LTAF.
The FCA is also consulting on proposals to remove the 35% restrictions on illiquid assets in unit-linked products where the investor is a qualifying default pension scheme. This would give LTAFs equivalent status to other illiquid assets which can meet the conditions for securing an appropriate degree of consumer protection, enabling firms to develop unit-linked products which contain other kinds of illiquid assets, but only under the same terms that currently apply to LTAFs, meaning that they can only be sold to default pension schemes.
The deadline for responses is 10 October 2022. The FCA aims to publish a final Policy Statement and Handbook rules in early-2023.
FCA Consultation Paper: Broadening retail access to the long-term asset fund (CP22/14)
Webpage
Press release
