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Communication on packaged retail investment products (PRIPs) : Frequently Asked Questions
Commission Européenne - MEMO/09/210 29/04/2009
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Brussels, 29th April 2009
What are Packaged Retail Investment Products (PRIPs)?
PRIPs are at the core of the retail investment market. They cover a range of investment products that are marketed to retail investors, which taken together make up a market in Europe worth up to 8 trillion EUR. Although there is no rigid definition of PRIPs and they take a variety of legal forms, they can be distinguished by the broadly comparable functions they perform for retail investors. They typically combine exposures to multiple underlying assets; they are designed to deliver capital accumulation over a medium- to long-term investment period; they entail a degree of investment risk, although some provide capital guarantees; and they are normally marketed directly to retail investors. Broadly speaking, they can be categorised into four groups: investment funds, insurance-based investment products, retail structured securities and structured term deposits.
What are the problems that are being addressed?
The retail investment market is a difficult market for consumers to navigate. There is a gulf in understanding between providers and distributors on the one hand and retail investors on the other. This is particularly the case for PRIPs which, while offering considerable benefits for retail investors, are often complicated and opaque. The information that is available to investors can be overly laden with jargon, complex and difficult to use for comparisons between different investment products. There are also conflicts of interest in the sales and advice process which may not result in outcomes that are in the best interests of the investor.
It is difficult to quantify the impact of these problems on retail investors, although evidence gathered through the consultation process indicates that it can be substantial. Consumers are not always fully aware of the scale or nature of the risks they are taking on, or they purchase investments which are not well-suited to their needs, or which represent poor value for money. These problems can lead not only to financial losses for the investor, but, when taken together, a wider loss of confidence in the retail investment markets. The problems have implications for the efficiency of the market and the ability of retail investors to make appropriate use of their savings.
What is proposed in the Communication? What are the objectives?
The objective is to better address the identified problems in the PRIPs market by creating a robust and coherent framework for PRIPs which will provide for consistent and effective standards for investor protection and a level-playing field for distributors and originators.
This will be achieved by adopting a horizontal regulatory approach to replace the current sectoral approach in two key areas: firstly, the rules on the form and content of pre-contractual information about the product, and, secondly, rules governing the sales process for PRIPs, such as the conduct of business of product distributors and the avoidance, management and disclosure of conflicts of interest in the sales or advice process.
The Communication does not set out detailed legislative proposals but provides a clear commitment to bring forward such proposals to deliver a horizontal approach to the regulation of disclosure practice for all PRIPs and for their sale by manufacturers and intermediaries. This approach will build on the most effective and efficient elements of existing Community legislation. It will require new horizontal legislation in some areas and will require existing legislation to be adjusted so as to avoid duplication of requirements or legal uncertainty. It will also require a clear definition of the products that are covered, so as to ensure all relevant retail investment products are included whilst avoiding legal uncertainty. A more detailed orientation will be published for consultation before the end of 2009.
What is the link with the Commission's response to the financial crisis?
The consultation leading up to the Communication began before the financial crisis and indeed many of the problems to be addressed have long been the object of regulatory attention. The financial crisis has however served to underline the importance of ensuring that investors are able to understand their investments and are treated fairly in the selling process. During the crisis, many products have underperformed compared to investors' reasonable expectations, and some investors have been exposed to risks of which they were unaware, for example those associated with guaranteed products. This has further undermined retail investor confidence in the financial markets. The Communication therefore forms part of the regulatory reform programme set out in the Commission Communication to the Spring European Council (IP/09/351), designed to rebuild confidence and to ensure responsible and reliable financial markets.
Are there any existing benchmarks for product disclosure and selling practices in this sector?
Although there is currently no agreed common format for product information documents, there is consensus around the principles that should govern them: they should be short in length, cover all the key information investors need and be presented in a clear and easy to understand format. Such documents should provide a reliable basis for informed decision-making. The Commission considers that the 'Key Investor Information' document currently being developed as part of the revised Undertakings for Collective Investment in Transferable Securities (UCITS) Directive is a good benchmark for disclosure practice in this area.
For selling processes, the Markets in Financial Instruments Directive offers a clear benchmark as it contains comprehensive rules covering the sales process, on such matters as conduct of business, inducements, suitability and appropriateness testing, and conflicts of interest. Further work will be necessary to establish how best to achieve a consistent and effective regulatory approach for all PRIPs, particularly for those that are currently outside the scope of the Markets in Financial Instruments Directive.
Have these problems not been addressed already by legislation at the Community level?
A substantial body of law already exists at Community level in order to protect investors. For example, the regulation of sales and advice is dominated by two recent directives, the Markets in Financial Instruments Directive and the Insurance Mediation Directive. These Directives include provisions on conduct of business at the point of sale and the avoidance, management and disclosure of conflicts of interest. Requirements on product disclosure appear in a variety of directives, including the UCITS Directive, the Prospectus Directive and the Consolidated Life Directive.
The problem is that the rules differ according to the legal form of the product and the channel or type of intermediary through which the product is sold. In some areas, there are no applicable rules. The Commission has concluded that this patchwork of legislation does not provide a coherent and effective regulatory framework for PRIPs. In particular, the level of investor protection may vary according to the legal form in which an investment is packaged. This may also result in an uneven playing field and distortions in the market, while current levels of investor protection might not be high enough for some products. The Commission therefore considers that a more coherent approach to product disclosure and selling practices is required if the market is to develop to the benefit of retail investors.
Why is action required at European level?
Several Member States have put in place additional legislative requirements to protect investors and to create greater consistency across products. However, inconsistencies in Community legislation mean that the Member States cannot address all of the issues. Moreover, responses to the identified problems have not been coordinated or systematic, with the result that the complexity of the regulatory environment in the European Union has increased while some of the underlying problems remain. The divergence in approach between Member States may also impede the further development of the internal market. The Commission has therefore concluded that greater coherence in the Community rulebook is a necessary step. This will provide a sound foundation for the effective and consistent regulation of product disclosures and selling practices for PRIPs throughout the European Union.
How will consumers benefit from the proposed changes? What other benefits will the changes provide?
The steps set out in the Communication will provide for a regulatory framework for PRIPs which is robust and coherent, serving as a solid basis for informed decision making by investors. Further harmonising and standardising product disclosures at the European level is likely to help retail investors compare between products, by showing the same key information in clear and similar formats. Applying equivalent standards to the selling process will also help to ensure that consumers' needs are better served, and boost consumer confidence that they will receive appropriate advice when they seek it.
A more coherent regulatory environment offers benefits not only for consumers but also for the manufacturers and distributors of PRIPs. It will contribute to ensuring that products and providers compete on a more level playing field. While other factors will also affect the market for PRIPs, greater consistency in product disclosure and selling rules will help to promote greater efficiency and the development of products that respond to consumer needs.
Will more or better regulation of product disclosure and sales practices really improve outcomes for retail investors? For instance, don't investors in practice often fail to read or use product information?
Improvements in disclosure standards only positively impact consumer behaviour when consumers read them, understand them, and make better choices as a result. There are many factors involved in consumer behaviour, which mean that in practice investors often do not read or use the information they are given. Investor testing will therefore play a key role in designing disclosures that consumers are actually likely to use. Moreover, investment in improving financial literacy through the European Union is vital to build consumer understanding of PRIPs and other products and hence to empower them to take better decisions and to protect their own interests.
It is also important to recognise that investors are very often sold products, rather than actively buying them. This means the conduct of the sales person is crucially important: are they treating their customer fairly? Are they able to assess whether a product is suitable or appropriate for that customer? It is for these reasons that these proposals focus both on the information investors need to make informed decisions and on the sales processes for PRIPs.
A coherent and effective regulatory framework at Community level will offer a good and necessary starting point for improved decision making and fair selling practices, even if it cannot by itself guarantee improved outcomes for investors. The continued efforts of the industry and national authorities will also be vital.
Is the Commission undertaking any similar work on other financial products such as credit products or insurance products?
The structure and functions of different types of PRIP raise a set of common issues which warrant their forming the focus of this Communication. However, the Commission recognises that there are general issues relating to product transparency and retail distribution that are not unique to these products. The Commission is therefore engaging in further work with respect to other retail financial services. For instance, the Commission is currently looking at the regulatory framework in place governing the sale of credit products, with a view to coming forward with measures to ensure responsible lending and borrowing by the end of 2009. The Commission is also in the process of reviewing, or plans to review, aspects of some of the major relevant pieces of legislation already in place, notably the Prospectus Directive and the Insurance Mediation Directive. While the scope of these Directives and hence of their reviews will be much broader than PRIPs, full account will be taken throughout of the links between these reviews and the work on developing detailed proposals on PRIPs. There is also some other more general work planned on the effectiveness of financial services information requirements across the insurance sector.
What are the likely costs to the industry?
The Commission recognises that delivering an improved regulatory framework will carry costs for the industry. The extent and distribution of these costs will depend on existing practice in particular sectors. While it is not possible to provide quantitative estimates in the absence of detailed legislative proposals, the Commission services have undertaken a high-level Impact Assessment, which contains an assessment of the impact of the fragmented regulatory framework for PRIPs at the Community level, possible options for addressing these issues, and the likely costs and benefits associated with these options. The Commission will provide a more detailed analysis of costs once more detailed proposals have been prepared. The Commission also considers that more consistent regulation in this area will reduce some costs for firms, particularly where they operate cross-border.
It can be argued that a fully level playing field between PRIPs will only be achieved if distortions resulting from taxation regimes are removed. What is the Commission going to do about this?
Some products are subject to more favourable tax conditions at Member State level. However taxation policy remains outside the scope of this work. The Commission notes that investor protection issues remain important, regardless of the tax structures which are present. Also, developing a consistent underlying framework for consumer protection will offer a better starting point in the future should it become easier – and there are signs of such developments – to separate underlying investment vehicles from the tax wrappers that deliver specific tax advantages.
Did the Commission consult with others on this work and does it intend to do so going forward?
A written call for evidence was published in October 2007, which attracted 80 responses from national regulators, consumer associations and originators and distributors for all of the products concerned. The results were published in a feedback statement in March 2008. In May 2008 a technical workshop was held with industry representatives. Over 300 senior representatives were bought together from across the industry, consumer groups and national and European institutions in July 2008 at an Open Hearing, to discuss the development of the market and potential risks to retail investors. An Impact Assessment was presented to the Impact Assessment Board and received a favourable opinion on 18 December 2008. The Commission's further work in this area will be undertaken according to the principles of better regulation, subject to further impact assessment and consultation with stakeholders.
What are the next steps?
The Commission will now begin work on developing detailed proposals. Input from all stakeholders will be sought in the development of these proposals. An orientation on the content and nature of these proposals will be published by the end of the year for public consultation. The results of this process will then form the basis of detailed legislative proposals and accompanying impact assessment work.